What are Equity Savings Schemes?

Introduced in 2014, Equity Savings Scheme (ESS) is a relatively new category of mutual funds. These are targeted towards investors who can take moderate risk and seek to benefit from capital appreciation of equity while receiving a regular income.

As per the provisions under the Union Budget of 2014, debt mutual fund investments needed to complete three years (against the one year earlier) for availing indexation benefits. This move meant that debt funds and the ilk, would be taxed in the same vein as would a Fixed Deposit (FD). This gave a boost to ESS.

ESS is being pitched as an alternative to fixed deposits with tenures over one year. This relatively new category of funds generates returns by investing the corpus in three parts: one-third in pure equity, one-third in debt and one-third in arbitrage.

ESS are conservative funds, similar to Monthly Income Plans (MIPs). However, on a risk-return axis ESS are slotted higher than MIPs but lower than balanced funds. From a taxation perspective, they are highly efficient because they are treated as equity funds.

Here is why you should consider investing in ESS:

  • Lower Volatility

In ESS, more than 50% of the corpus is invested in debt and arbitrage with the remaining finding their way into equities. Their low exposure to equity means that they are less risky. The volatility is also reduced as these funds also actively use derivative strategies.  

It is important to note that Equity Savings Schemes are not recommended for building long-term wealth. In that aspect, pure equity funds are the way to go. ESS are suggested to investors with existing equity heavy portfolios, for adding a debt component. These schemes help balance their portfolio and hedge risks.

  • Tax Efficiency

Equity savings schemes are treated at par with equity funds as far as taxation is concerned. Investments held for over a year in these funds are not accounted for tax. But, in case redemption happens within a year, a short-term capital gains are taxed @ 15%.

The savings schemes have low exposure to the volatilities of equity, and bank on generating returns by allocating funds in arbitrage instruments. This allows the portfolio to earn stable returns with low risk.

This is a great investment idea for clients who are risk-averse, but look for more than just bank interest. ESS is a smarter alternative to fixed deposits, and is more tax efficient than traditional debt mutual funds.

An experienced team at Edelweiss Partners help you understand the various mutual funds and investment options at your disposal so that you can recommend the best products to your clients. Become an Edelweiss Partner to get access to a platform that will transform your business.

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