Use equity savings mutual funds to protect downside risk, say advisors

In the current volatile times, you will see that while most equity categories have given negative returns, equity savings schemes have delivered positive returns.

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Mutual fund advisors are asking conservative investors to use equity savings mutual funds to tackle the volatility and uncertainty in the stock market. Mutual Fund advisors say the portfolio mix of equity, debt and arbitrage tries to protect the downside risk. Equity savings funds invest in equity, arbitrage and debt. They can invest a minimum of 65 per cent in equities, including arbitrage positions, and a minimum of 10 per cent in debt.

“Conservative investors who fear market volatility but still want exposure to equities in their portfolio can opt for equity savings scheme. The arbitrage component in the portfolio of these schemes try to protect the downside risk,” says Swapnil D Kendhe, founder, VivekTaru. Those who are not ready to tackle the volatility of aggressive hybrid schemes can also go for the equity savings funds, he adds.

If you look at the last one year returns, you will see that while most equity mutual fund categories have given negative returns, equity savings schemes have delivered positive returns. The data will make it clear how this category uses the arbitrage opportunity to beat other equity mutual fund categories in volatile markets.


In the last one year, the top performing fund in the small category has given -4.42 per cent, the best performing mid cap fund has generated -1.42 per cent, the best performing actively managed large cap has given 5.57 per cent, best multi cap fund has generated 3.89 per cent and the best equity savings fund has given 5.45 per cent in the same time period.

Another big advantage of equity savings funds is taxation. These schemes are treated as equity schemes for the purpose of taxation. Short term capital gains on investments of less than 12 months are taxed at 15 per cent and the long term gains exceeding Rs 1 lakh on investments held for more than 12 months are taxed at 10 per cent.

Mutual fund advisors say the equity taxation makes the category a better option than liquid and ultra-short term funds to park money for a shorter period and shifting money through a systematic transfer plan (STP) to other equity funds. Short term gains in debt funds held for less than three yeas are added to income and taxed as per the tax slab of the investors.

“We advise investors to use equity savings funds instead of liquid funds or ultra-short term funds to park their money due to the equity taxation. Investors can also opt for STP to pure equity funds after one year to avoid exit load,” says M.S. Shabbir, founder and managing director of SenSage Financial Services.
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Shabbir further says these funds are suitable for the investor community looking for Shariah-compliant funds. He says, “this special community of investors do not like to go for debt mutual funds. Equity savings funds serve as an alternative option for them.”

Mutual fund advisors, however, say that investors should not expect very high returns from these funds. They say these funds are not meant to generate high returns but to protect the downside.

“The idea of investing in these schemes is not to generate very high returns. Investors can expect 9 to 11 per cent returns in a good market. They can expect a maximum of 14 per cent,” says Kendhe.

In the past these schemes would have given much higher returns, but that was due to some micro economic factors. Investors should not be influenced by the abnormally high returns as the ‘reversion to mean’ will play and bring back the returns to the normal, say advisors.

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