Taxation of Equity Savings Fund: How they are taxed?
Wealth managers think that conservative investors switching from fixed deposits might think about investing in equity savings funds, which offer the benefit of equity taxes and allocate 15–25% of their corpus to large-cap equities, notwithstanding the high valuations.
Equity Savings Funds: What Are They?
Schemes for equity savings are funds belonging to the hybrid category. The investments are made in debt, equity, and arbitrage opportunities. This type of scheme uses a combination of three investment strategies: pure equity (net long equities), arbitrage plays, and debt to invest in equity and debt securities. The majority of the net long stock exposure is in large-cap firms, which leads to the generation of capital growth. Investment in debt securities and arbitrage opportunities yields steady profits for the portfolio and provides income.
What is the Portfolio Composition?
Generally, 65–90% of the portfolio should be made up of equity, of which 25–75% might be arbitrage opportunities, 15–40% could be unhedged equities depending on the fund manager’s approach, and the remaining 10–35% could be debt and money market instruments. In general, the fund manager would choose to have a larger allocation in the portfolio if he is positive on equities. Typically, conservative fund managers maintain it between 15 and 25% including large-cap businesses comprising equity. The debt component is also handled cautiously via investments made in short-term government securities or AAA-rated paper.
Taxation of these Funds – How?
These schemes’ portfolios are set up so that the corpus invested in stocks and arbitrage stays over 65%. For tax purposes, they are thus categorized as equity mutual funds. These programs are appealing to investors who fall within the 30% tax bracket because investors pay 10% long-term capital gains tax for a holding period of more than 1 year for gains exceeding 1 lakh and 15% short-term capital gains tax for holding periods of less than a year.
How have these Schemes Performed? For Whom are they Suitable?
Value Research data shows that this category of funds has given a return of 9.39% over the last three years. Financial advisors claim that these plans work well for investors seeking returns higher than those of fixed deposits for a three-year period, are switching from FDs to mutual funds for the first time, or are concerned about the high volatility of pure equity funds. These funds are generally appropriate for investors that have a short time horizon of one to three years and are looking for low-volatility equities exposure. A bonus is the tax advantage.
