HDFC Equity Savings Fund: Buy. HDFC Equity Savings Fund: The right balance of risk and returns

Equity Saving Funds, as a category, are fast gaining attention, given their tax efficiency and stability in returns. These funds combine the characteristics of debt, balanced and monthly income plans to offer better post-tax returns than bank fixed deposits.

Currently, there are 13 schemes under this category. These funds were either launched recently or converted from existing schemes, after the Budget (in 2014) took away tax advantages that debt mutual funds enjoyed over bank products. The tenure for claiming long-term capital gains tax on debt funds had then been increased from one to three years. Hence, the NAV history is limited for the schemes under the equity saving category.

But investors looking for relatively higher returns than debt funds or monthly income plans, along with lower volatility, can consider these funds as a diversifier.

Within the category, HDFC Equity Savings Fund has a sound track record (since its attribute and name was changed from HDFC Multiple Yield Fund in December 16, 2015).

This fund has beaten the category by a huge margin over a one- and two-year time frame, clocking 24 and 11 per cent annual return, respectively. The category generated 13 and 7 per cent returns, respectively, during these periods.

The other good performing schemes from the category are Birla Sun Life Equity Savings Fund, ICICI Pru Equity Income Fund and Reliance Equity Savings Fund.

Equity Saving Funds essentially invest in equities, debt and arbitrage opportunities. While equity provides a kicker to returns, debt offers stable returns with low volatility.

The arbitrage strategy is used to take advantage of the price differentials in various market segments such as cash and futures market. Actively using derivatives helps the funds not only to reduce the volatility of returns but also to earn some extra returns.

In equity savings funds, there is a good chunk of unhedged equity that can help boost returns (vis-à-vis pure arbitrage funds). As the equity and the derivative exposure is considered as ‘equity’ allocation, these funds fit the criterion of an equity fund, since at least 65 per cent of their corpus is invested in hedged and unhedged equity.

Hence, fund holders don’t have to pay tax on gains from sale of units held for more than a year. This is where these funds score over debt funds and MIPs.

On the risk and return matrix, this category of funds is placed above MIP and debt funds, but below balanced funds.

Hence one should not expect returns similar to pure equity funds and these funds cannot be used to build long-term wealth.

These funds are essentially suitable for investors looking for some exposure in equity but with lower risk appetite. The ideal holding period would be one to three years, to make the most of tax benefits, otherwise unavailable for pure debt funds.

HDFC Equity Savings Fund’s latest portfolio shows the sum of the hedged (26 per cent) and un-hedged equity (39 per cent) at 65 per cent.

The category has maintained this exposure in the past between 65 and 85 per cent.

The equity portion follows a multi-cap strategy. The current portfolio, however, is tilted towards large-caps.

The debt portfolio predominantly consists of corporate bonds — a current mix of AAA (12 per cent) and AA rated (10 per cent) securities.

The average maturity of the scheme has been 1-2 years.

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