Equity Savings Funds: In A Sweet Spot

Conservative equity exposure and much-celebrated tax efficiency make it ideal for safe investors, especially retirees

For equity savings funds, life has come full circle. These funds first shot to the limelight in 2014, presenting themselves as better alternatives to debt funds, thanks to a tax tweak. Cut to 2023, their investment case has become even more compelling. With debt funds – in fact, all mutual funds with less than 35 per cent equity exposure – having lost indexation benefits (a feature that reduced tax liability), equity savings funds find themselves in the reckoning again. Let’s understand why.

Tax advantage over debt funds

Equity savings funds typically invest about 30 per cent each in debt, equity, and arbitrage opportunities. At this point, you may question that since these funds have less than the 35 per cent equity exposure, how have they escaped the fate meted out to debt funds? Thank the inclusion of arbitrage opportunities. This portion enables equity savings funds to enjoy the tax benefits of equity funds while maintaining a riskreturn profile similar to those of debt funds.

What this means is that investors of equity savings funds will be subject to just a 10 per cent tax (if held for more than 12 months). By comparison, the gains made from debt-oriented funds will be added to the annual income and then taxed accordingly. This amounts to a significant additional tax burden for someone in the 30 per cent tax bracket (earning above `10 lakh per annum).

Their investment case