26 Oct Equity Savings Fund
Hybrid funds take care of asset allocation but once a hybrid fund falls below 65% equity allocation, it gets taxed as a debt fund.
Despitete this a category emerged which was popularly known as MIP.
This fund had about 70% to 85% debt allocation and the balance equity.
Naturally in a growing market like India it would be incorrect to lose out on the power of equity.
This fund worked well for retired people falling in lower tax brackets.
However debt taxation made it less attractive for people in higher tax brackets although the need of having this kind of a fund with about 15% to 30% equity allocation did exist.
Enter a new category called the Equity Savings Fund.
This fund too has about 30% equity allocation but the balance isn’t debt.
Another 30% is invested in Arbitrage (read my note on Arbitrage sent to you two days ago) and the rest in debt.
This structure attracts equity fund taxation and makes the offering quite irresistible.
While the fund appears like an equity fund in terms of assets and tax treatment, it works exactly like an MIP.
This kind of a fund should be a part of one’s portfolio during times when markets appear expensive.
It should be used to rebalance client portfoios.
It is a good fund for 12 to 15 months duration
It is a suitable fund for retired people wanting regular cash flows by the SWP route.
In essence this fund breaks the back of MIPs to a large extent because of a more attractive tax treatment.
Here one must also note that while dividends of MIP attract dividend distribution tax the dividends of the Equity Savings Fund are tax free (like equity funds)