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Hybrid mutual funds are suitable for investors with high-to-moderate risk profile when equity markets are volatile. Among the hybrid funds SEBI has mandated, Equity Saving Funds are gaining investors’ attention given their tax efficiency and stability in returns.
These funds combine the strategy of investing in equity, debt and arbitrage opportunities. Since these schemes allocate at least 65 per cent to equity and arbitrage opportunities, they are treated as equity funds for tax purposes.
As per the current tax structure, dividends and capital gains (if redeemed after a year) under these funds are taxed at 10 per cent (plus, surcharge, if any, and cess).
Currently, there are 16 schemes under this category. Kotak Equity Savings is one such fund which has delivered notable returns since its launch.
The fund has outperformed its category over one-, two- and three-year time-frames, clocking a compounded annualised return of 8.7, 8.8 and 8.6 per cent, respectively.
The category generated 4.3, 6.9 and 7.8 per cent returns, respectively, during these periods.
Suitability
These funds are suitable for investors looking for some exposure in equity but with lower risk appetite.
The holding period would be 1-3 years based on the investor’s financial goals.
Equity saving funds have to invest a minimum of 65 per cent in equity and equity-related instruments.
The allocation to debt performs the task of protecting the downside, while the equity portion helps spice up returns. These funds capitalise on arbitrage opportunities in the cash and derivatives segment of the equity market.
Hedging strategy helps the funds reduce volatility in returns.
Portfolio
Kotak Equity Savings has maintained an average combined equity exposure (equity + hedged position) of around 65 per cent over the last year.
As per the latest portfolio (August 2018), the combined exposure stood at 70.5 per cent. The latest allocation to hedged and unhedged positions was 27 and 43 per cent, respectively.
In equity, the fund has followed a conservative approach in the past, having relatively higher exposure to large-cap stocks.
Of the equity portion, the fund currently holds 20-25 per cent of assets in mid-cap stocks, with the remaining in large-caps.
The top three sectors are finance (16.3 per cent), consumer non-durables (16.3 per cent) and software (15.6 per cent).
On the debt side, the fund follows a very conservative approach by investing in higher-rated debt papers. The fund also invests in debt instruments with a residual maturity of 2-3 years, reducing rate risk.
As per the latest portfolio, the fund has allocated 11 per cent in AAA rated debt instruments, and 2 per cent in non-convertible debentures (NCDs) with AA+ rating.
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