Why Invest in Hybrid Equity Savings Fund?
By Akhil Chugh
Date April 16, 2023
The government has done away with long-term capital gains tax on debt mutual funds. Any gains on debt mutual funds purchased after 1 April will be treated as short-term capital gains, regardless of the holding period. The earlier favorable regime of 20% tax with the benefit of indexation for debt funds held longer than three years has been eliminated.
Investors looking to allocate to fixed-income products that enjoy better tax treatment than traditional choices, such as fixed deposits, non-convertible debentures and debt mutual funds, should consider adding Hybrid Equity Savings fund to their portfolios. These plans provide tax benefits that apply to equity-oriented schemes, thus ensuring better tax-adjusted returns.
Let’s understand more about this Hybrid Equity Savings Fund category and look at some of its advantages for mutual fund investors.
What is a Hybrid Equity Savings Fund?
Hybrid Equity Savings Fund is an open-ended mutual fund scheme that invests its assets in equity, debt and arbitrage opportunities. This mutual fund category comes under the hybrid Mutual Funds that was introduced by SEBI in its mutual fund recategorization in 2017. According to SEBI regulations, the fund should invest a minimum of 65% of assets in equity & related arbitrages, and a minimum of 10% in debt securities. The fund invests an average of 25-35% in pure equity on an annual basis.
In these funds, the fund manager looks to exploit the pricing inefficiencies in the cash and derivatives segments of the equity market. Thus, the fund’s overall equity exposure is partially hedged, reducing its volatility as compared to an aggressive hybrid fund, where the equity exposure is fully unhedged.
Hybrid Equity Savings Fund score over pure equity and aggressive hybrid funds on risks because of their downside protection while their equity exposure enables them to generate potentially higher returns compared with bank fixed deposits & debt mutual funds with greater tax efficiency.
How does Hybrid Equity Savings Fund work?
According to SEBI regulations, Hybrid Equity Saving Fund can invest in equity and equity-related instruments, debt securities, and arbitrage opportunities using hedging strategies. A minimum 65% of its assets has to be in equity & related arbitrages and the rest in debt.
The fund has exposure to equity and debt securities, making it a diversified fund and hence spreading the risk to more than one asset class. The fund invests in arbitrage opportunities making it easier for the fund managers to switch between asset classes according to market sentiments. Thus, managing the risk in an efficient manner.
The fund offers better returns than fixed deposits as it invests in arbitrage opportunities. And the fund is tax efficient as the fund majorly invests in equities and follows the equity taxation rules.
Benefits of Hybrid Equity Savings Fund
1. Reduced volatility:
Hybrid Equity Savings Fund offers a diversified portfolio by investing in equities, debt and arbitrage opportunities, reducing the impact of equity market volatility on investor’s portfolio.
For example, let’s say an investor has held an Equity Savings Scheme for six months, succeeding which the equity portion of the portfolio has shed about 10% of the value. Now, if the debt segment of the scheme generates about 6% annual returns and the arbitrage segment bring about 6.5% returns, then the investor’s loss will be minimised to an extent.
Thus, cumulative return from Equity Savings Fund will only reduce marginally even with the 10% market decline. Whereas, balanced funds or equity market schemes would have generated negative returns, the quantum of which would have depended on the type of stocks in said portfolio.
2. Arbitrage benefits:
The arbitrage portion of the portfolio is a big advantage as it provides stable and low-risk returns.
3. Portfolio Diversification:
Hybrid Equity Savings Fund offer a diverse investment portfolio through a single investment channel. Thus, investors do not need to analyse the performance of different funds and select one that is best suitable for their needs. They can simply invest in Equity Savings Fund and let asset managers handle the selection of portfolio.
How Hybrid Equity Savings Fund are taxed?
Hybrid Equity Savings Fund enjoy equity taxation like Hybrid Equity Funds or Balanced Funds. Long-term capital gains (holding period of more than 12 months) in Hybrid Equity Savings Fund are tax-free up to Rs 1 Lakh in a financial year. Thereafter, it is taxed at 10%; short-term capital gains (holding period of less than 12 months) are taxed at 15%.
Dividends paid by equity savings fund are taxable in the hands of the investor.
Key Takeaways from Net Brokers:
- Hybrid Equity Savings Fund are best suited for investors looking for equity exposure for a medium-term investment horizon. The ideal investment horizon for these funds is around 3+ years.
- These funds have exposure to debt and arbitrage opportunities as well and hence making them less risky than pure equity funds. However, they come with the advantage of better returns than pure debt funds due to their equity exposure & tax efficiency. Thus, investors who do not possess the disposition to withstand the volatility of the equity market can find equity savings mutual funds suitable for their needs.
- Equity taxation means returns are tax-efficient when compared to Fixed Deposits & debt funds. Hence investors looking for lower tax liability can invest in these funds.
- Investors who want to venture out from conventional saving options like Fixed Deposits and Recurring Deposits can consider investing in a Hybrid Equity Savings Fund.
Hybrid Equity Savings Fund are ideal for investors with a time horizon of 3+ years and are looking for reasonable returns with lower volatility along with added tax advantage. For more information, get in touch with us today.
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Happy investing.