This scheme is a relatively new financial instrument introduced to the Indian money market. Equity saving schemes are hybrid funds that invest in equity, debt and arbitrage securities.
The fund's overall equity exposure is partially hedged, reducing its volatility as compared to an aggressive hybrid fund. Diversification of fund investment helps to neutralize the volatility related to the stock market to quite an extent.
They aim to provide capital appreciation and income distribution to the investors by using equity and equity related instruments, arbitrage opportunities, and investments in debt
and money market instruments.
These funds are suitable for those who cannot withstand too much volatility in the value of their investments and are content with moderate returns which are slightly higher than fixed income options.
These funds can provide a moderate, but steady stream of income. Their diversification makes them an attractive option for investors with a moderate risk profile, who want capital appreciation and a steady income.
Few of these funds also look to provide investors with dividend incomes on a regular basis, even though they are not mandated to do so.
However, investor should remember that these funds are not substitute to equity fund investments and also that their investment horizon should be more than 12 months. The ideal investment horizon should actually be 2-3 years.
Taxation of Equity Savings Fund is like Hybrid Equity Funds or Balanced Funds. If investors hold the funds for over 12 months, the returns from it below Rs. 1 Lakh are exempt from taxation.
Long term capital gains (holding period of more than 12 months) in equity savings funds are tax free upto Rs 1 Lakh in a financial year. Gains over Rs 1 lakh are taxed at the rate of 10%.
If the mutual fund units are sold within 1 year from the date of investment, entire amount of gain is taxed at the rate of 15%.
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