We all have heard this
famous saying from our elders and well wishers “When one door closes another
opens”. But the sad part is that we always look at the closed door and cry
instead of looking around and finding the new opportunity available. This
famous saying also applies to investment world. The budget of 2014 made debt
funds long term after a period of 3 years instead of previous clause of 1 year.
This single amendment changed the entire investment pattern in debt/MIP funds
and FMPs and we have seen downfall in MIP inflow and new FMPs and also large
withdrawals due to tax liability till 3 year. So is there any other option
available which is more tax friendly. The answer to this is newly launched equity
income fund and equity savings fund category. I will try to decode the equity
savings fund in this article.
Equity Savings Fund is
a good option for conservative investors with balance of equity and debt. This Fund
is placed between MIP/Equity income funds and Balanced funds. MIP/Equity income
funds invest up to 25% in equity and the balanced funds invests 65% or more in
equity. There was no option available for the investors between MIP funds and
balanced funds for equity investment which gives tax advantage after one year. This
fund will help investors take the middle position as it invests up to 40 to 50%
in equity and the balance investment goes into arbitrage and debt funds.
The equity savings fund
is classified as equity fund as it invests 65% or more in equity category including
arbitrage. The arbitrage means buying in cash market and selling the same
quantity in future and option market. So if any fund does arbitrage means there
is no equity risk as the equity position is hedged in f & o segment. The income
if any in this fund will be treated long term capital gain after a period of
one year and will be tax free. Tax planning is one of the most important
aspects of financial planning. In investment you should look at post tax
returns and not gross return. This fund has added advantage as the entire debt
return is also tax free as this is classified as equity fund.
According to me this
category is purely a balance between equity and debt. Balancing in investment
is also important to get the desired result. One of the best ways of balancing
in investment is proper asset allocation. Further it is not only important to
invest according to asset allocation but it is equally important to rebalance
the portfolio periodically. The rebalancing happens automatically in this fund
and the same gives you added advantage when the markets are too volatile. As
per objective of the scheme which is pre decided fund manager can’t invest more
or even less in equity than decided percentage at any given point of time. So
when the markets are high the fund manager has to compulsory sell equity to maintain the maximum
level and likewise when the markets are low fund manager has to increase the
equity investment to maintain the minimum level of equity investment. The
process is continuous which a normal investor can’t do because of lack of
knowledge and expertise. Rebalancing is the process of restoring your portfolio
back to its original asset allocation.
Surely this product is
not meant for one year time horizon even it gives tax free return after one
year. Equity investment always is risky investment and 40 to 50% equity investment
can give you negative return if your time horizon is less than 3 years. The
equity savings fund is suitable for those whose time horizon is 3 years plus and
can extend for another one year if needed. I normally don’t recommend any fund
which has not completed 3 years time but this new category can easily be compared
by averaging returns of MIP funds and balanced funds.
The category return of aggressive MIP fund for 3
years is around 13% and for 5 years return is around 10% whereas the category
return of balanced fund for 3 years is around 18.50% and for 5 years return is
around 12%. Even we take conservative figures of 5 years average then the
returns come to around 11% p.a. tax free. So this fund can give you 3 to 4%
more if you take calculated risk and can absorb the volatility in between. The
returns in equity savings funds or any other mutual fund scheme are not
guaranteed as the funds are market linked. Proper home work always help us to
take informed decision.This article first appeared at indianotes.com
http://www.indianotes.com/Finance-How-to/Equity-Savings-Fund--Truly-balanced-fund/195299/2/T
