With the change in the taxation of debt fund units purchased on or after 1st April 2023, the focus shifts on (1) the change in the investment mandate of certain existing schemes, (2) the launch of balanced hybrid funds (these can hold 40-60% equity) and (3) equity savings funds.
In our coverage of this topic, we have already discussed the first two aspects. And the change in mandates has already begun.
- Debt mutual fund screener (Mar 2023) for selection, tracking, learning
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Now, we consider equity savings funds.
What are equity savings funds? These are hybrid funds mandated to hold 65% of Indian equity at all times. The rest will usually be in bonds. The equity allocation has hedged equity (arbitrage holding) and unhedged equity (normal stock hold or long positions). SEBI has mandated that AMCs disclose the hedged and unhedged holdings in the scheme documents.
Are they alternatives for debt funds? Certainly not! They can hold a significant amount of unhedged equity in the portfolio. So they will be much less volatile than typical equity funds but more volatile than debt funds. For example, this is the last three-year volatility (standard deviation) of three funds from ICICI.
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- ICICI Pru Gilt Fund(G)-Direct Plan 1.0225%
- ICICI Pru Equity Savings Fund(G)-Direct Plan 2.1910%
- ICICI Pru Nifty 50 Index Fund(G)-Direct Plan 5.6775%
Gilt funds are the most volatile in the debt fund space. The ICICI equity savings fund is twice as volatile as the ICICI gilt fund. Therefore equity savings funds should not be considered debt fund alternatives.
Do not make the mistake of investing in equity savings funds instead of debt funds only to save tax. As mentioned earlier, changes in tax rules should not govern our investment products. Only our investment strategy should.
How much equity do they hold? It depends on the fund. As of March 26th 2023, these are some equity savings funds’ lower and upper limits.
- ICICI 15-50%
- HDFC 15-40%
- SBI 20-50%
- Kotak 10-50%
- Axis 20-45%
- Mirae 20-45%
- UTI 20-50%
- Edelweiss 15-50%
- DSP 20-55%
- ABSL 20-45%
How can funds that can hold 40-50% equity call themselves equity “savings” funds?! These funds can be viewed as dynamic asset allocation funds that change direct equity allocation per market conditions. And they can also buy corporate bonds. So they come with interest rate risk and credit risk as well.
Can I invest in equity savings funds instead of debt funds from 1st April 2023?
- If you are new to mutual funds, you should not consider equity savings funds.
- If you consider yourself a retail investor finding it hard to invest enough for your goals, then you should not consider equity savings funds. This would only increase overall portfolio risk.
- If you are an accomplished investor, appreciative of risks, in the highest tax slab, have accumulated a sizeable corpus, and have a sizeable investment to make each year, then and only then are equity savings fund a reasonable alternative to debt funds. However, do not buy them for the short term.
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