How are equity savings funds different from monthly income plans?

In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.

In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.

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The English translation of the article is as under:

In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.

In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.

These funds are a hybrid of three portfolios, instead of two in case of MIP. The three parts of an equity savings fund are: equity portion, debt portion and arbitrage portion. The exposure to the debt securities is kept below 35% in these cases, to ensure equity exposure (combined between pure equity and through arbitrage positions) at all times is above 65%. As we discussed in case of the arbitrage funds, keeping equity exposure above 65% gives these funds the status of equity-oriented funds for the purpose of income tax. Due to that, the dividends from these funds are tax-exempt in the hands of the investor as well as exempt from dividend distribution tax. The short term capital gains are taxable @ 15%, if the gains are booked within one year. If the holding period is longer than one year, the capital gains are qualified as long term and hence such capital gains are tax-exempt.

This offers a wonderful investment option for the conservative investor – stable portfolio returns with high tax-efficiency.

However, one must keep certain points in mind about this portfolio.

1.     This is not a debt fund, but a hybrid fund, having exposure to equity

2.     The fund has net positive exposure to equity, unlike arbitrage funds, where open equity exposure is covered by derivatives. Such a net positive equity exposure means the fund can exhibit higher volatility than arbitrage funds.

3.     The net equity exposure may be higher than in case of MIP, such schemes could deliver higher long term returns with high volatility in the short term. The risk is higher.

Given this, it is advisable to consider these funds only if you have money to be invested for medium to long term periods. These funds are not suitable for short term investments. Given the tax advantages, these funds could be a better option in comparison to MIPs.

- Amit Trivedi