Equity savings schemes are mutual fund plans that allocate their funds to equity funds, debt funds, and arbitrage. By diversifying across different segments, ESS aims to optimise returns while managing risk effectively.
Understanding the Equity Savings Scheme
This investment approach distinguishes ESS from conventional schemes, with around 30%-35% of the investment dedicated to equities and the remaining split between debt income funds and arbitrage.
The equity portion safeguards investors against purchasing power erosion, while the debt and arbitrage segments act as buffers against market fluctuations. If the equity market experiences a 10% decline, returns from the debt and arbitrage segments could help minimise the overall loss.
Understanding the taxability of Equity Saving Scheme
- Equity savings schemes are classified as equity assets for tax purposes.
- Gains from holding ESS for more than 12 months are subject to a 10% tax rate. If gains are less than Rs 1 lakh, they are not subject to any taxes.
- Investments held for less than one year incur a tax rate of 15%.
Advantages of investing in an Equity Savings Scheme
Stability in returns
Equity savings schemes allocate over 50% of funds into debt and arbitrage holdings which ensures more stable returns compared to pure equity investments. Fund managers employ derivative strategies to reduce volatility.
Arbitrage opportunities
The arbitrage segment provides significant advantages in terms of stable returns. Fund houses are proficient in arbitrage techniques, which offer low-risk returns by prioritising stability in their investment portfolios.
Diversified portfolio
Leading equity savings funds offer diversification through a single investment vehicle. Investors are relieved from analysing and selecting individual funds, as ESS provides exposure to a range of assets managed by professionals.
Comparison between top 3 Equity Savings Scheme funds
India has witnessed a rise in Equity Savings Scheme funds in the last two decades. Holding these funds for more than 12 months is advisable, as early redemption may incur an exit load charge of 1%.
| Fund | Since Inception | 1 Year | 5 Year |
|---|---|---|---|
| HDFC Equity Savings Fund | 9.57% | 16.77% | 10.76% |
| Kotak Equity Savings Fund | 9.43% | 18.05% | 10.76% |
| SBI Equity Savings Fund | 8.96% | 19.78% | 10.96% |
SBI Equity Savings Fund has achieved the best recent returns with a slight margin above HDFC and Kotak Equity savings schemes — though past performance is not a guarantee of future results.
Conclusion
Equity Savings Schemes suit traditional investors seeking high returns while maintaining a level of risk mitigation. Before investing, consider tax treatment, exit loads and how ESS fits your overall asset allocation.
