Equity Savings Scheme

Published by Sharekhan Education | January 11, 2022

Equity Savings Scheme

Does the term “Equity Savings Scheme” bring to mind a mutual fund scheme that will help you save tax? You are wrong if you think so. The scheme that will help save your tax is “Equity Linked Savings Scheme” and not the “Equity Savings Scheme”. Confused aren’t you? Well! Don’t be. These similar sounding schemes are way different from each other in all aspects. Whereas the ELSS or the Equity Linked Savings Scheme is the popular and most sought after for tax saving purposes; the ESS or Equity Savings Scheme is still waiting to come to limelight. It is time therefore to understand this scheme better and know if it can be a part of your portfolio and when.

The following points will help you get to know this scheme better.

• Unlike ELSS which is a pure equity fund; the ESS is classified as a hybrid fund with its portfolio comprising not only of equity but also debt and arbitrage securities in a percentage as mandated by SEBI.
• Being hybrid in nature this fund delivers benefits of both equity and debt; where the equity component provides capital appreciation and helps beat inflation; while the arbitrage and debt portion provides steady income and a safety net to minimize downside risk.
• Investments in arbitrage securities are a unique feature which sets these funds apart from the pure equity and other hybrid funds. Arbitrage means making riskless profit by exploiting the price differences in the cash and derivatives markets. The fund manager uses arbitrage to hedge the fund’s equity portion thereby reducing its volatility as compared to an aggressive hybrid or pure equity fund, where the equity exposure is fully un-hedged.
• To help investors make informed investing decisions the fund is mandated to mention its exact hedged and un-hedged portion in its Scheme Information Document.
• Equity investing is generally for the long term but if you are looking for equity exposure with goals approximately 3 to 5 years down line or if you are an investor wanting to deviate from conventional investing options, ESS can be a useful choice.
• As the portfolio of ESS funds have exposure of at least 65% of the total assets to equity and equity related instruments they are taxed as an equity fund. This means that any long term gains over Rs. 1 lakh would be taxed at a special rate of 10% while the gains up to Rs. 1 lakh would be tax-free in your hands. The advantage of equity taxation is also enjoyed by the debt portion of the portfolio, eliminating separate tax payable on the gains realized on it.

Conclusion:

The bottom-line is that an equity savings scheme with its unique portfolio and tax efficient returns can be suitable for you if you have a medium term goal and are willing to take moderate risk. It’s important to note that returns from these funds may be affected by the volatility of the unhedged equity portion and the occasional absence of arbitrage opportunities.

Happy Reading……….