Best Equity Savings Mutual Funds

The ideal investor profiles for equity savings funds include the following: 

• First-timers- If you are a beginner and do not want to take higher risks, equity savings funds may be a good choice. 
• Conservative investors- If you want to preserve capital more than aiming for higher returns, the arbitrage and debt portions of these funds may attract you. 
• Those looking for tax efficiency- These funds are more tax-efficient than debt funds, since they are treated as equity funds for taxation purposes.
• Retirees and those looking for a consistent income- You may consider these funds if you want a steady flow of income. Some funds come with dividend payouts, and the stable debt component may ensure consistent returns.
• If you have a medium-term investment horizon- If you can invest for 3-5 years to achieve specific goals, these funds are balanced and viable options.

Factors to Consider Before Investing in Equity Savings Mutual Funds

Here are the factors worth considering before investing in these funds. 

• Investment goals- Equity savings funds are best for consistent and moderate returns with lower risks. You should invest only if you have an investment horizon of 3-5 years. 
• Risk appetite- While these funds are less-risky in comparison to pure equity funds, they do not eliminate risks completely. Decide based on how comfortable you are with market volatility. 
• Investment strategy- Check the asset allocation of the fund carefully before investing, since not every equity savings fund is the same. 
• Past track record- Examine the historical track record of the fund over the last 3-5 years, checking performance across multiple market cycles. 
• Expertise of the fund manager- Your fund should be managed by a fund manager with adequate professional experience and a robust track record.
• Expense ratio- Compare the expense ratios of multiple funds before finalising your decision.
• Diversification- Make sure that the fund holdings are not concentrated more in a specific sector, which may otherwise enhance risks. 
• Risks- The un-hedged component will always have market volatility-linked risks, while the debt component is vulnerable to interest rate risks. 
• Exit load- Most equity savings funds do not have specific lock-in periods, although some may charge an exit load fee. This is applicable if you redeem the investment within a particular short-term duration.

Major Advantages While Investing in Equity Savings Funds

Here are some of the main advantages of investing in equity savings funds. 

• Better diversification- These funds help you diversify the portfolio through investments in arbitrage, debt and equity. This naturally lowers your overall risks. 
• Tax benefits- Equity savings funds are more tax-efficient than many other types of funds. 
• Reduced volatility- The equity portion of the fund generates higher returns, while the debt component offers lower volatility and higher stability. 
• Higher growth potential- You can still earn higher returns than many fixed-income investments.
• More liquidity- Since these are open-ended funds, investors may buy and sell shares as per their convenience. This ensures higher liquidity than many other types of investments.
• Professional management- These funds are actively managed by professionals with the expertise to navigate market cycles and optimise returns for investors.

Risks Involved While Investing in Equity Savings Funds

Some of the risks of investing in equity savings funds include:

• Stock market volatility-linked risks from the unhedged portion of equity investments. 
• Interest rate risks of the debt instruments present in the portfolio. 
• Arbitrage risks may impact the overall performance of the fund.
• Returns from equity savings funds have inflation risks, i.e. they may not always keep up with inflation.
• Credit risks of the debt component of the fund, which may lead to capital losses for investors. 
• Heavy dependence on the performance of the fund manager.
• Complex structure of mixed assets, making it harder to understand the specific asset allocation and fund strategy.
• Limited upside during bull runs, due to a higher focus on mitigating risks and achieving higher stability. 
• Limited net returns due to higher exit load fees for early redemption.

Taxation of Equity Savings Funds

These funds are perceived as equity assets for taxation purposes. If you earn less than ₹1.25 lakh in long-term capital gains (LTCG) in a financial year, it will be tax-free. Anything beyond this amount will be taxed at 12.5%. Yet, if you hold the fund for less than 12 months before selling, then your short-term capital gains (STCG) will be taxed at 20%. 

Choosing the IDCW option means that the dividends from these funds will be added to your taxable income and taxed as per your applicable income tax slab rate. TDS of 10% applies in case your total dividend income crosses ₹5,000 in a financial year. Securities transaction tax (STT) is payable upon buying or selling equity-oriented fund units on any stock exchange. It is 0.001% of the transaction value for equity savings funds.