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

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).

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.

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