Equity Savings Funds are considered as open-ended equity-oriented schemes according to the SEBI categorization norms and they invest in equity and its related instruments, debt, arbitrage and money market instruments.
For investing in an equity savings fund, a top-down and bottom-up approach is followed. 15% to 30% of the fund corpus is invested in equity. Allocation of debt is managed by the fund manager, generating higher returns and considering moderate credits as well as risks related to interest rate fluctuations. Besides being exposed to equity of both hedged and un-hedged positions, these funds aim to provide capital appreciation and distribution of income. 30% of the fund corpus is invested in medium and long term bonds, comprising of G-secs. This will benefit investors during bond price fluctuations due to a decline in interest rates. To cushion the volatility in returns, 40% to 50% of the corpus is invested in equity arbitrage.
Equity savings funds are suitable for small investors as they come with lower risks and require smaller capital for investment purposes. They also ensure a more diversified investment portfolio. Prior to investing in these funds, you should have clear knowledge about how these funds behave and perform during fluctuations in the market. Get a clear picture about the maximum chances of fluctuations that may hinder fund performance. Look at the performance figures for the last few years; check the consistency of returns rather than the point-to-point returns.
Try to invest in these funds during peak times and continue investing for a longer period. This will increase the chances of good returns. This fund supports a diverse portfolio and thus the negative impact on the portfolio is less during adverse price fluctuations. It is easy for investors to invest in these funds as a detailed study of the stocks is not required. The returns from equity and equity-related instruments have remained higher than other asset classes for the past few years. You get exposure to portfolio diversification, that is, if you invest in equity funds, then you can be exposed to several stocks.
If you are investing in an equity-linked savings scheme, then you can get a tax exemption of Rs 1.5 lakh under section 80C of the Income Tax Act. The transaction costs are reduced but you need to pay for entry loads and expense ratios, which are required by the fund manager to manage your funds. One can redeem the fund within 2 to 4 working days based on the fund type. You can invest through SIPs i.e. Systematic Investment Plan, where they allow you to invest a small amount of money at regular intervals. Thus you can choose the investment amount depending on your investment abilities and goals. You can get stable returns even during market fluctuations.
While looking for the quality of the portfolio, check for adequate diversification, that is, it should not be highly concentrated and well-diversified. Credit quality checking is also important since it ensures that the portfolio is not investing in low-rated debt instruments. Consider the turnover ratio and expenses as well. The quality of fund management should be well known before investing. Check the fund manager's work experience, several schemes previously managed and the efficiency of the fund company in managing funds.
It is suggested that you should identify your financial goals and how much they are related to the fund investments, time horizon and overall risk tolerance capabilities. Considering your risk appetite, try making a personalized asset allocation chart and review your portfolio for keeping track of the same. For better knowledge, consult a professional advisor.