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.