What every investor can expect from their equity saving funds

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RBI) and the Federal Reserve suggest that interest rates may be peaking. Adding to all these, recent taxation changes in debt funds have made asset allocation even more complex for retail investors. In this regard, equity savings funds from the hybrid category may be considered by investors with a modest risk appetite looking for downside protection, but not superior returns.

Apart from equity and debt, these funds use equity arbitrage via derivatives to reduce risks and potentially generate better inflation adjusted returns. One key advantage that these funds offer is the equity taxation, as their gross equity exposure (including arbitrage) is above 65% of the portfolio at all times Here is more on how equity savings funds could be a hybrid category that is a useful addition to portfolios of conservative investors. Of course, some risks also need to be considered before taking a final call.

Derivatives investments Equity savings products are managed very conservatively with an attempt to lower the volatility while participating in equities. The fund portfolio essentially consists of: Equity: Usually the equity allocation on a net basis (adjusted for arbitrage or hedged portion) varies between 20% and 40% of the portfolio. The focus is primarily on market leaders or large caps with some allocations to the larger mid caps, given the overall focus to reduce volatility.

In line with risk management practice, the aim is to diversify the portfolio with participation across sectors. Arbitrage/derivatives: Fund houses hedge the equity part of the portfolio by using derivatives. This hedging strategy helps to add equity exposure to the portfolio without increasing the equity risk.