Many classical investors desire returns that are a little higher than those on fixed income. Some use low-rated bonds for this purpose, while others choose the route of stock. The Equity Savings Fund (ESF) offers investments in both equity and debt while also reducing taxes. These funds are in charge of 19,311 crore rupees’ worth of assets. For those who are willing to take some risk, ESF is a better option. These funds are better suited for risk-averse investors because of their restricted stock exposure. Avoid these funds if you don’t want to invest in shares or if your duration is less than a year. Unlike fixed deposits (FD), these plans do not offer fixed returns. During times of low returns, it is advised to hold onto your investments in these.

Pure equities exposure is the term used to describe ESF funds’ investment of 15 to 35 percent of their assets in stocks. The fund manager engages in cash and futures arbitrage trading such that at least 65% of his capital is invested in equity and equity-linked schemes. The remainder is allocated to bonds. Investing across categories by ESF helps in achieving maximum returns with less volatility in the stock market. In this approach, risk and return are kept in a healthy proportion. For the 1- and 3-year periods ending September 6, ESF had an average return of 9.3% and 10.9 percent in its category.

Fund managers invest their equity share typically in large-cap equities with low volatility because these funds are offered to low-risk investors. Value Research estimates that as of July 31, 2023, large-cap stocks accounted for more than 80% of the equity allocation of these plans. Additionally, the majority of schemes Favor investing in shorter-duration, high-quality bonds for fixed-income allocation. The majority of the funds in this category have strong portfolio credit quality (mostly AAA and equivalent) and have short tenures. Their credit risk and interest rate risk are both decreased in this way.

These funds are deemed equity funds for tax purposes since they maintain a minimum gross equity allocation of 65% (net of equity investments and arbitrage). On assets held for more than a year and with a profit of more than Rs 1 lakh, long-term capital gains tax is assessed at a rate of 10%. Taxes on short-term capital gains are assessed at a rate of 15%. Contrarily, capital gains tax on debt funds is assessed based on the investor’s or individual’s tax rate. Due to this, typical investors in higher tax rates find ESFs to be appealing.

According to experts, these funds may have limited room for development, but they also offer security from economic downturns. Due to the modest stock exposure, the upside may be constrained in bull markets, but unlike other equity-focused funds, the downside is likewise constrained in down markets.

However, during certain years, ESFs give poorer returns than fixed-income returns despite having less volatility than pure equities funds. For instance, this group had an average return of 4.22 percent in the year 2022. ESF returns will be impacted by equity and debt risks, but since these funds are well-invested across various schemes, the impact is typically minimal.

The investment duration in these funds should be maintained for at least two years, according to experts. For the best results, the term should be between two and five years. Investors are permitted to allocate between 10% and 25% of their capital to this sector.