Equity Savings Funds: Defensive Play with Tax Benefits

Equity Saving Schemes are relatively a new breed of Mutual Funds which attempt to balance out income, growth and tax efficiency. As returns from pure equity mutual fund schemes are totally linked to market improvements, these schemes are not suitable for all category of investors. This gave rise to host of hybrid fund schemes among which equity oriented Balance fund schemes (Equity approx > 65%), nd Monthly Income Plan schemes (Equity in region of 10-15%) are more well known and are in vogue.
Changes in Tax rules few years back extended tax free benefits after one year holding (Long term gains) only to those schemes that invested 65% or more in equity  and debt schemes or equity schemes with less than 65% equity lost tax benefits and only could qualify for indexation benefits after three years of holding. This forced Balanced funds which earlier may be having  40-50%  exposure to equity to increase the same to minimum 65% to avail tax benefits .As a result while Balanced funds continued to be  tax efficient and with enhanced equity exposure qualified as  tax free after one year, they became more risky in a market downturn. On the other hand Monthly income Plans with 10-15% equity component continued to be defensive plans but lagged on tax efficiency  as only way to take some tax advantage was to hold them for three years period and take benefit of indexation. Same is the case with Hybrid conservative funds which have up to 35% (approx) equity component.

Enter, Equity Saving Schemes which are now offering a middle course and offer a mix of  equity, arbitrage and debt opportunities. Through investing a potion of their portfolio in arbitrage opportunities (which loosely means to invest in equity products to leverage the price differential in the cash and derivatives market with a view to generate returns), these funds are able to maintain the >65% stipulation for equity funds while their uncovered or long equity bets may be quite low. Thus while the Equity Saving Funds have more than 65% of exposure to equity on paper, a considerable portion of this is covered (arbitrage opportunities) and the net long equity positions are in range of 20-30% only (approx). The fund may invests upto 35% in debt and money market instruments, including margin for derivatives (some funds prefer arbitrage option to debt as arbitrage is also quite risk free).

These schemes are at at a lower risk level than regular equity based funds/balanced funds as the actual equity exposure setting aside arbitrage portion does not exceed 30-40%. The arbitrage portion helps the scheme to qualify as tax free after one year and along with debt portion reduces the volatility and risk.

Performance of Equity Saving Schemes: 

Sl No. Scheme Name Nav on 25/5/17 % Return  Year to date (Annualized) % Return 1 Year  AUM in Rs. Crore Expense %
1 Birla sun life equity savings fund – direct plan – growth 10.81 27.73 18.59 514 2.3
2 DSP blackrock equity savings fund – direct plan – growth 10.18 19.63 14.83 743 2.41
3 HDFC equity savings fund -direct plan – growth option 27.164 24.76 25.26 975 1.92
4  Kotak equity savings fund – direct – growth 11.2533 14.25 11.2 734 2
5 Reliance equity savings fund- direct plan- growth plan-growth option 10.3459 24.36 15.93 539 2

Equity Saving Schemes in general carry a 1% exit load if redeemed before one year. Besides the above Equity Saving Schemes, there are similar schemes by other fund houses also. These include :

  • SBI Equity Savings Fund ( Last one Year return 11.85%)
  • L&T Equity Savings Fund Last one Year return 11.18%)
  • Principal Equity Savings Fund ( Last one Year return 11.63%) etc.

While Equity Saving Schemes in general maintain a minimum 65% share of equity through arbitrage and pure equity investments there are subtle differences in the schemes which explains the variation in returns. Objectives of these schemes which illustrate these differences are as follows:

  1. Birla Sun Life Equity Saving: The scheme seeks to provide capital appreciation and income distribution to the investors by using a blend of equity derivatives strategies, arbitrage opportunities and pure equity investments.
  2. DSP BlackRock Equity Savings Fund: he Scheme seeks to generate income through investments in fixed income securities and using arbitrage and other derivative Strategies. The Scheme also intends to generate long-term capital appreciation by investing a portion of the Scheme’s assets in equity and equity related instruments. 
  3. HDFC Equity Savings Fund: The scheme aims to provide capital appreciation and income distribution to the investors using arbitrage opportunities, investment in equity / equity related instruments and debt / money market instruments. 
  4. Kotak Equity Savings Fund: The scheme seeks to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and enhance returns with a moderate exposure in equity & equity related instruments.
  5.  Reliance Equity Savings Fund: The scheme seeks to generate income and capital appreciation by investing in arbitrage opportunities & pure equity investments along with investments in debt securities & money market instruments.

As can be seen above, some Equity Saving Schemes give more importance to Arbitrage opportunities vis a vis debt and are more of Arbitrage+Equity based with preference to Arbitrage, while others are giving equal importance to Debt, Arbitrageas and Equirt and are composed of Debt+Arbitrage+Equity portfolio. The first type of schemes like Kotak will generate less return in a up market situation but will have lower downturn in eventuality of stock markets not faring well. The opposite is true for second type of schemes illustrated by the likes of HDFC Equity Saving Scheme which give better returns when market conditions are favorable but is slightly more vulnerable if there is a downturn in stock markets.


With Bank and Small Saving rates plummeting to new lows, Mutual funds offer a good opportunity to investors of all categories to optimize their post tax return. Mutual funds also posses the ability to defer tax to subsequent years as well as earn tax free returns through investment in equity dominated schemes.

The Equity saving funds are suitable for investors who want a pie of equity growth but are wary of substantial capital erosion. These schemes are suitable for all category of investor but those who are 50+ or are nearing retirement or have retired may find them more attractive as in these years they may feel a need to have slightly better returns if possible but with safety against capital erosion. These funds could be better alternative to MIPs(Monthly income Plans) as they enjoy tax advantage as well. This makes them suitable for all class of investors who want to defer or reduce their tax liability and increase their post tax returns. With minimum risk these funds provide an opportunity to participate in a limited way in equities. The arbitrage and debt portion provide a degree of safety and even in normal market conditions these fund are capable of giving double digit returns. These fund fall in between MIP and Balanced funds in terms of risk and reward with same tax advantage as balanced or equity funds.

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