The New Chinese Dosa: Equity Savings Fund

Human beings hate tax. They will do anything to reduce their tax outgo. Debt mutual fund investors received a jolt when the government erased the tax arbitrage that existed between bank fds/rds and non-equity funds (not just debt!).

Taking advantage of the fact that arbitrage mutual funds are (as of now!) taxed like equity mutual funds, fund houses are launching a new fund category: Equity Savings Funds.

This is sold as a low-risk, tax-free alternative to debt mutual funds.

Here are some examples:

1) JP Morgan India Equity Savings Fund
Under normal circumstances:
Equity 65-5% out of which 55-90% can be arbitrage.
Rest in debt
However the fund manager can decrease equity exposure to below 65% if debt instruments are attractive.

While JP Morgan does not highlight the investment duration, Kotak is promoting its equity savings fund as a tax-free option for 1-year duration

2) Kotak Equity Savings Fund
Direct Equity exposure: 15-25%
Arbitrage + Debt: 5-85%

3) Cafemutual reports that SBI, Birla Sun Life, ICICI Prudential and Reliance have such funds on the pipeline.

Should I invest?

Such funds are being projected as superior to arbitrage funds. Perhaps they maybe superior with respect to the quality of the arbitrage opportunities. However, the exposure to direct equity (recency bias?!), and debt would make the fund much more volatile than liquid-plus funds, and at least as volatile as a debt-oriented balanced funds (of which monthly income plans are the most popular).

Invest in these funds only if you have some cash lying around and do not know what to do with it! But first recognise that to have un-tagged cash lying around could be a sign of poor fiscal health.

Do not invest in these funds or for that matter any debt fund if you have a one-time expense less than or equal to 3 years away. Use bank deposits even if you are in the highest tax-slab.

If you have a staggered expense, use a liquid fund or liquid-plus (ultra short-term) fund.

The idea is to identify and understand the need and then locate a suitable instrument for it.

Remember that tax-free long-term capital gain is only one side of the coin. Never forget to take into account the associated volatility.
There is a pretty good chance that such funds could deliver returns comparable or even lower than post-tax bank deposits.
So when you are have an important goal in mind, why take a chance?

It is for the same reason (volatility) that I recommend bank deposits for those in the 30% slab even if the DDT rate ~28% for the dividend reinvestment option is lower.

Never focus on the return. Always evaluate the associated volatility (and therefore risk wrt your goal). For these funds the associated risk is pretty high for short durations. Never touch any fund which has got even a small amount of direct equity for 5 years or lesser durations.

About the title: A chinese dosa is a dosa stuffed with Chinese food (typically noodles)- an unnecessary culinary marriage.

'The new chinese dosa' because, this would not be the first time amc have come up with such unnecessary products - unnecessary for goal-based financial planning that it.

Seems to be reasonably productive move from an 'asset gathering' point of view: Cafemutual reports that the Jp Morgan fund collected about 160 Crores during the NFO period. Like I said, human beings hate tax!

Why not stick to plain dosas?      Happy Diwali.

dsc01079.jpg

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

21 thoughts on “The New Chinese Dosa: Equity Savings Fund

  1. Piyush Khatri

    Nice article Mr. Pattu. Even I am in agreement here that you should not have equity exposure unless your goals are at least 5-6 years away. Especially in mutual funds, where someone else directs your money into market. Even today I strongly suggest going into direct equity if your risk appetite allows you for duration lesser than 5 years. Condition: You should have strong research abilities and enough patience to enter and exit at the right moment.

    Happy Deewali Sir! Keep spreading the knowledge and I hope to get some too.

    Reply
  2. Piyush Khatri

    Nice article Mr. Pattu. Even I am in agreement here that you should not have equity exposure unless your goals are at least 5-6 years away. Especially in mutual funds, where someone else directs your money into market. Even today I strongly suggest going into direct equity if your risk appetite allows you for duration lesser than 5 years. Condition: You should have strong research abilities and enough patience to enter and exit at the right moment.

    Happy Deewali Sir! Keep spreading the knowledge and I hope to get some too.

    Reply
      1. sid

        Sir, I would like to bring to your notice that many MIPs have a high duration. Also the equity percentage is dynamic. So blindly selecting a MIP may turn out to be very risky. It may be better to invest in short term debt fund & the required equity exposure in a large cap fund. Also the equity portion portion becomes tax fee in 1 year.

        Reply
        1. pattu

          Hi, Yes I am aware of this. Having a fixed equity component will certainly help. However the equity component one should use depends on the duration and importance of the goal.

          Reply
      1. sid

        Sir, I would like to bring to your notice that many MIPs have a high duration. Also the equity percentage is dynamic. So blindly selecting a MIP may turn out to be very risky. It may be better to invest in short term debt fund & the required equity exposure in a large cap fund. Also the equity portion portion becomes tax fee in 1 year.

        Reply
        1. pattu

          Hi, Yes I am aware of this. Having a fixed equity component will certainly help. However the equity component one should use depends on the duration and importance of the goal.

          Reply
  3. Raghu Ramamurthy

    I dont understand why we should not NOT at all invest in Debt Funds for a duration of less than 3 Years..Any Capital Gain you make from such investment for less than 3 Years will be considered as your normal income and taxed
    accordingly.The tax treatment is the same as for income from FD.The only consideration is whether the return from a Debt Fund is higher or not than the
    return from FD.

    Reply
  4. Raghu Ramamurthy

    I dont understand why we should not NOT at all invest in Debt Funds for a duration of less than 3 Years..Any Capital Gain you make from such investment for less than 3 Years will be considered as your normal income and taxed
    accordingly.The tax treatment is the same as for income from FD.The only consideration is whether the return from a Debt Fund is higher or not than the
    return from FD.

    Reply

Do let us know what you think about the article