Equity savings funds provide a tax-efficient investment option for investors with a low to moderate risk appetite. They aim for returns higher than conventional fixed-income products, while keeping equity market volatility in check.
The funds under this hybrid mutual fund category typically allocate 25–30 per cent to equities, 35–45 per cent to arbitrage, and 25–35 per cent to debt. The arbitrage and equity components ensure over 65 per cent exposure to equity instruments, enabling these funds to qualify for favourable equity taxation. This makes them especially attractive to conservative investors seeking better returns than fixed income without taking on substantial market risk. The equity savings fund category is positioned between income plus arbitrage funds on the low-risk end and balanced advantage funds on the higher-risk side, offering a balanced risk-return profile.
Among the better performers in the equity savings category is Edelweiss Equity Savings Fund. Known for its above-average returns, the fund focuses on low-volatility equity investments and high-quality debt instruments. Over the last seven years, it has delivered a compounded annual return of 9.3 per cent, reflecting the strength of its conservative and disciplined approach.
Equity allocation
The fund follows a largely static allocation strategy: 25 per cent to equity, 30 per cent to debt, and approximately 45 per cent to arbitrage. The equity portion is managed using a factor-based investing approach, emphasising quality and low-volatility parameters to maintain a cautious stance. Within its equity allocation, around 75 per cent is invested in large-cap companies —about 18–19 per cent of total assets. The remaining equity portion, roughly 6 per cent of the fund’s assets, is invested in mid- and small-cap companies drawn mainly from the NSE 500 universe, with a bias towards the top 300 stocks.
Debt strategy
Debt comprises about 30 per cent of the portfolio and is managed through an accrual strategy, with exclusive exposure to AAA-rated securities. The average maturity of the debt holdings ranges from three to five years, and the fund typically adopts a buy-and-hold approach. It steers clear of high-credit-risk and long-duration securities, aligning with its overall conservative strategy. The portfolio has maintained an average allocation of 14 per cent to government securities over the past three years, aiding in meeting liquidity needs. Corporate debt exposure has ranged between 1–7 per cent, with key holdings in prominent names like HDB Financial Services, NABARD, and NHB.
Arbitrage approach
Arbitrage constitutes 40–45 per cent of the portfolio and is critical in balancing return generation with tax efficiency. This strategy takes advantage of pricing inefficiencies between the spot and futures markets. Key to arbitrage selection is the spread between spot and futures prices, which defines the return potential. Arbitrage tends to perform well in bullish or volatile markets but is less effective during prolonged downturns. For instance, the fund benefitted from strong arbitrage opportunities during February to April 2025, supported by PSU dividend announcements, budget-related expectations, and liquidity tightening. However, from October 2024 to February 2025, arbitrage returns weakened as the broader indices declined for five consecutive months, shrinking spreads and reducing returns.
Performance
Edelweiss Equity Savings Fund has consistently delivered above-average returns across various equity and interest rate cycles. Its conservative strategies across equity and debt have helped reduce volatility. For example, during the steep 38 per cent fall in the Nifty 50 between January and March 2020 due to the Covid-induced correction, the fund declined by only 9 per cent, significantly outperforming the category average of -16 per cent. More recently, between September 2024 and June 2025, it delivered a 3 per cent return versus the category average of 2 per cent.
An analysis of five-year rolling returns over the past decade shows that the fund delivered an average annual return of 9.2 per cent, ahead of the category average of 8 per cent. Its five-year returns have ranged between 6.5 per cent and 12.6 per cent.
The regular plan has an expense ratio of 1.6 per cent, slightly below the category average of 1.7 per cent. The direct plan is cost-efficient at 0.6 per cent, also lower than the category average of 0.7 per cent. For investors, a minimum investment horizon of three to five years is ideal to benefit from the fund’s stability and tax efficiency. While the proceeds from debt funds and bank fixed deposits are taxed as per the investor’s slab rate regardless of holding period, equity funds with at least 65 per cent equity are taxed at 20 per cent for short-term capital gains (held <1 year) and 12.5 per cent for long-term gains (held >1 year, above ₹1.25 lakh).