Equity “Savings” Funds meant as short-term investments suffer huge losses

The huge losses suffered by Equity Savings mutual funds illustrate why one should avoid equity exposure for short-term goals and regular income

Published: March 29, 2020 at 11:16 am

Last Updated on August 30, 2021 at 8:58 am

Several mutual fund houses recommend “equity savings” funds for short-term goals (1 to 3 years and up) and for “regular income”. All funds in this category have suffered huge losses in this crash rendering “equity savings” as an oxymoron. This is yet another proof of why one should not use even “a small amount of equity” for short-term needs.

Equity savings as a category was born from a need to ensure AUM does not escape fund houses when in late 2014 the government classified duration for long-term debt fund gains as 3-years (up from 1). When fixed maturity plans (FMPs) became less sought after, the fund houses decided to create, what we had then referred to as a Chinese dosa -an unnecessary and dangerous mixing of equity and debt.

What was once believed to a mix of debt and arbitrage for favourable taxation later actually proved to be a cocktail of debt, arbitrage and significant amounts of equity. We had advised against the general use of these funds or at least not for short-term goals (< 5Y).

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

If you visit the respective equity savings fund pages of AMCs, you will find some truly bizarre recommendations. According to Mirae Asset Equity Savings Fund, it can be used for 1-3 years. In fact, this is both the “ideal investment horizon” as well as the “recommended investment horizon by Mirae. HDFC MF says 1.5 to 2 years (18-24 months_). Franklin 1Y and above. Kotak and ICICI 3Y and above.

This category saw the creation of a segregated portion by Reliance (now Nippon India) when Reliance Capital bonds defaulted and now with this crash the excessive amounts of equity held by these fund has painfully come to light.

During the 32-day window between Feb 20th and March 23rd when Nifty TRI fell 36.8% equity savings fund performance is tabulated below.

Scheme Name32 Day abs return %
Nippon India Equity Savings Fund-24.3
Mahindra Dhan Sanchay Equity Savings Yojana-20.5
SBI Equity Savings Fund-19.2
ICICI Pru Equity Savings Fund-18.8
DSP Equity Savings Fund-18.8
IDBI Equity Savings Fund-18.5
Mirae Asset Equity Savings Fund-18.2
L&T Equity Savings Fund-17.6
Axis Equity Saver Fund-17.4
Aditya Birla SL Equity Savings Fund-17.3
IDFC Equity Savings Fund-16.9
Kotak Equity Savings Fund-16.4
Franklin India Equity Savings Fund-16.2
HDFC Equity Savings Fund-16.1
Sundaram Equity Savings Fund-16.0
PGIM India Equity Savings Fund-15.4
Union Equity Savings Fund-14.3
Tata Equity Savings Fund-13.8
Principal Equity Savings Fund-13.8
Invesco India Equity Savings Fund-13.6
UTI Equity Savings Fund-13.0
Edelweiss Equity Savings Fund-9.5
Baroda Equity Savings Fund-8.3

Investors who had used this fund for “regular income” and those who used for just a few year goals are scarred forever.

According to SEBI Categorisation rules, the equity saving scheme characteristics is defined as:

Minimum investment in equity & equity related instruments-65%of total assets and minimum investment in debt-10% of total assetsMinimum hedged & unhedged to be stated in the SID.

While this is reasonable, Mirae’s fund fell 18% meaning they have way too much equity for a 1-3 year “ideal investment horizon”. The same is true for all other AMCs references above.

Equity savings fund on average fell 16% of Nifty during the time window considered above. A hybrid index fund with 25% equity (CRISIL Short Term Debt Hybrid 75+25 Fund Index) fell  ~ 11%.  CRISIL Hybrid 35+65 – Aggressive Index that has 65% equity fell 25%.

This means that equity savings funds typically held 30-40% equity (with some on the lower side). This is simply too much equity for the short duration over which the fund is recommended and for “regular income”

The problem is here is three-fold: 1: Use of the word “savings:  is misleading; 2: suggested use for “regular income” is clearly wrong as the risk on the principal is too high; 3: recommendation of short-term use and excessive use of equity can only mean AMCs are clueless about when to use equity and how much. The same information would be drilled into their distribution channel to be communicated to investors.

At least after this painful lesson, investors learn to read the scheme documents to understand how risky a fund can be and SEBI directs the removal of unhedged equity (direct equity) from equity savings fund portfolios.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)