What are Equity Savings Funds: Definition, Features and Investment Benefits

Equity savings funds can be defined as mutual funds that invest the assets across debt, equity and arbitrage instruments. This type of asset allocation offers investors the opportunity to get the benefit of portfolio diversification by investing in a single scheme.

As per current SEBI guidelines equity savings funds are mandatorily required to invest at least 65% of their assets in equities and equity derivatives and also at least an additional 10% in debt-oriented instruments. While current guidelines do not provide any minimum or maximum limit for arbitrage investments, these have to be specified in the Scheme Information Document (SID) of the fund.

Since equity savings hybrid funds offer a high degree of diversification across multiple asset classes, they can help investors build a diversified investment portfolio that maximises returns while minimising potential equity investment risks.

Below is a short list of the key features and benefits of equity savings mutual funds:

Since at least 65% is invested in equity-oriented instruments, equity savings hybrid funds are treated as equity funds for taxation purposes as well. This means investors are subject to capital gains taxation rules on their investment returns.

Long-term capital gains from equity assets and stocks i.e. when holding period is 1 year or longer, gains below Rs. 1 Lakh are exempt from taxes. Any capital gains exceeding this threshold in a financial year are taxed at a rate of 10%. However, if the investor holds the funds for less than 12 months, the tax implications are based on the short-term capital gains rate, which is 15% on returns.

Equity savings funds present an ideal investment choice for individuals seeking equity exposure but lacking the capacity for long-term investments. These funds carry lower risk compared to other equity assets while aiming to generate certain returns. Moreover, some of these funds may offer regular dividend incomes, even though it is not compulsory for them to do so.

As a result, investors who prefer to avoid the equity market's volatility can find equity savings mutual funds well-suited for their requirements. Furthermore, those who are exploring alternative options to traditional savings can also consider the ESS portfolio.

Additionally, investors with an investment time frame of fewer than 24 months can fulfil their needs with this investment option.

However, it's important to note that these funds should not be considered as substitutes for other funds with pure equity holdings, especially for those with long-term investment goals. Thus, if you have long-term investment goals, you can consider looking at other savings plans .

For informed investing decisions, performing due diligence before parking your money in any instruments is recommended. Thus, before you choose to invest through equity savings funds or any other investment fund, consider knowing what your investment would weigh in after a specified period that you intend to stay invested. For this, you can use an Investment Plan Calculator which is an online tool that allows you to calculating the future returns from an investment.