Why Equity Saving Schemes can be a good option for the risk averse investor

Equity markets are at an all-time high and many investors are feeling jittery. For them, financial advisers are recommending Equity Saving Schemes (ESS). A relatively low-risk product that invests in a mix of stocks, debt and arbitrage opportunities is finding favour among investors who are worried about a possible market correction. ESS with 1/3 of their corpus in equity, arbitrage and debt is better placed to deal with any likely downside.

“We are asking our clients to invest in equity saving schemes so that they do not miss a rally in equity markets and at the same time be safe from the downside,” says Vivekh Pathak, a Delhi-based financial planner.

Another segment of investors who stand to gain from this product are those who are venturing into the market for the first time, and who may not have the stomach for volatility. Says Ashish Shankar, Head, Investment Advisory, Motilal Oswal Private Wealth Management: “Investors who are moving from traditional forms of investments such as bank fixed deposits to capital market related investments should consider investing in ESS now.”


The pattern of investment of ESS is what differentiates it from other schemes like pure equity, balanced funds or debt income funds. ESS invest 30-35% of the corpus in equities and rest in debt and arbitrage. Rajiv Shastri, CEO, Essel Mutual Fund, explains, “In a pure equity scheme, typically 90% is invested in equity, while in a balanced fund, this proportion is between 50 and 70%. Debt funds invest the entire amount in debt instruments such as bonds, corporate debentures, government securities and money market instruments.”

Equity saving schemes have posted decent returns since inception

Source: Accord fintech; COMPILED BY ETIG DATABASE

Tax efficient schemes
The biggest USP of these schemes is the favourable taxation. They are treated as equity schemes for taxation purpose. Investments held over a year in them qualify for long term capital gains tax, which is zero at the moment.

Cushion against sharp falls
These schemes provide the necessary cushion of debt and arbitrage and minimise downside. Let’s take the example of an investor who has held an equity savings scheme for six months after which the equity portfolio sheds 10% of its value. Assuming the fixed income portfolio generates 7% annualised returns and the arbitrage portfolio generates 5.5% annualised returns, the total loss for the investor will be minimised.

The total return from the ESS will only be marginally down despite the 10% decline in markets whereas the pure equity or balanced funds will post negative returns between -7% and -15%, depending on stocks in the portfolio.

Structure of ESS acts as a cushion
Even if the equity market falls by 10%, over a 6-month period, the returns generated by the debt and arbitrage components minimise loss.

Assumption: Fixed income portfolio generates 7% annualised returns and arbitrage portfolio generates 5.5% annualised returns

Shankar says, “Over time, as accruals keep accumulating from the arbitrage and fixed income part of the portfolio, investors are that much more protected from a possible equity market crash.” Experts say this scheme has the ability to outperform traditional fixed income products due to the controlled exposure to equities which can generate additional returns.

Should you invest in ESS?
ESS are suitable for conservative investors who do not have the temperament to withstand the vagaries of the equity market or first time investors who want to move from traditional savings options to capital market linked investments. These schemes also suit those who have an investment horizon of 18-24 months and more. Vidya Bala, Head of MF Research at Fundsindia, says, “The purpose of investing in this category should be to go with the funds that hold downsides well when market crashes.”

One must invest in a scheme that has delivered consistent returns over the years, and is available at a low total expense ratio.