Equity Saving Schemes: A powerful and efficient investment option

In the current market scenario, when the equity markets are witnessing huge volatility, investors are seeking safer, yet higher yielding modes of investment. For this, investors are trying to allocate their investment wisely in debts as well as equities to get assured returns.

The RBI’s move to cut key policy rates and the subsequent transmission of benefits to the banking system has led to the reduction of the interest rate on FD’s, saving deposits as well as other bank saving options. Owing to this, investors are seeking alternatives to these traditional modes of investment.

The risk averse or conservative investors in this pool are seeking safer options with the balanced investment including Hybrid funds. Traditionally, there were two types of hybrid funds, Monthly Income Plans (MIPs), which are more concerned with debt and Balanced funds, which are equity-based.

In 2014 a new entrant to this fund category, Equity saving fund was introduced, which has gained attraction among many investors and institutions. The main reason behind this was the change in the taxation policy for the debt funds. In 2014 Union Budget, the minimum holding period for non-equity funds, that is, debt funds for long term capital gain taxation was changed from 1 year to 3 year that is 36 months from 12 months, which reduced the attractiveness of debt funds. This led to the creation of the Equity saving schemes (ESS) which provides cushion of debt and arbitrage to the investors and minimizes downside risks.

Equity saving funds invest close to one-third of their investment in equity instruments which is more than 30-35 per cent in equities and balance in debts, derivatives and arbitrage.

The biggest benefit of ESS scheme is tax efficiency. As the investment corpus of these funds is adjusted in such a way that the 65% of the holdings comes under gross equity investment, the funds are treated as equity mutual funds for taxation purpose. So, these funds enjoy exemption in long term capital gain tax if the holding is more than a year. However, if the holdings is less than a year then it will attract short capital gain tax of 15%. Also, dividends received from these funds/schemes are exempted from the DDT (dividend distribution tax).

Equity portion of these investment assures the higher return potential and debt investments provides stability to investments. Moreover, use of derivative instruments reduces the net equity exposure thereby protect the investor from market volatility.

With these perquisites the ESS are best suited investment options for the investors with lower risk appetite like the people reaching to their retirement age or planning for a retirement can invest in such funds with the SIP (Systematic Investment Plan) options and can utilize it with the SWP (Systematic Withdrawal Plan) at a specific time. 

With the tax efficiency and unique investment strategy the Equity saving funds gives a smarter investment option to investors with the security of returns.