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Investors looking for relatively higher returns than debt funds and wanting some equity exposure with lower volatility can consider investing in equity savings funds.
Equity saving funds, one of the hybrid fund categories, have been gaining investor attention lately, given their tax efficiency, and stability in returns. These funds combine debt, equity and arbitrage opportunities to offer better post-tax returns than bank fixed deposits.
Taxation
Since these schemes allocate at least 65 per cent of their portfolio to equity and arbitrage opportunities, they are treated as equity funds for tax purposes. As per the current tax structure, dividends and capital gains (if redeemed after a year) under these funds are taxed at 10 per cent (plus, surcharge, if any, and cess).
Investors with a medium risk profile and with at least a three- year time-frame can consider investing in these schemes.
Currently, there are 22 funds under this category; most of them have a track record of around five years.
HDFC Equity Savings is one of the better-performing funds in the category. Its fundamental attributes and name were changed from HDFC Multiple Yield Fund on December 16, 2015. It has delivered a compounded annualised return of 10 per cent since then.
The fund has beaten the category by a huge margin over one-, two- and three-year time-frames, clocking 3.2 per cent, 4.6 per cent and 10.7 per cent annual returns, respectively. The category generated 2.1 per cent, 4.2 and 6.9 per cent annual returns, respectively, during the same periods.
The exposure to debt papers and hedged positions reduces the fund’s volatility which is inherent to directional equity exposure.
The scheme allocates 15-40 per cent to equities, providing a kicker to returns. An allocation of 10-35 per cent to debt papers offers stable returns with low volatility.
The scheme tries to capitalise its arbitrage strategy by allocating 25-75 per cent to arbitrage based on the market condition. Under the arbitrage strategy, the fund takes advantage of the price differentials in various market segments such as cash and futures market. Active use of derivatives helps it to not only reduce the volatility of returns but also earn some extra returns.
Portfolio
As per the latest portfolio (April 2019), HDFC Equity Savings has maintained 31 per cent of its portfolio in hedged (arbitrage) and 38 per cent in unhedged equity. The fund follows a multi-cap approach, though it tilts towards large-cap stocks. The ratio of large- to mid-cap stocks as per the latest portfolio stands at 87:13. The large-cap slant lends comfort in volatile markets.
In the fixed-income portfolio, the fund invests in a mix of AAA, AA and A rated corporate debt and G-Secs.
As per the latest portfolio, the fund has invested about 7, 6.6 and 5 per cent in AAA, AA and A rated NCDs (non-convertible debentures), respectively. Exposure to A rated debt papers includes Punjab National Bank and Syndicate Bank. The average maturity of the scheme has been 1-2 years.
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