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Equity Income Scheme: A budding investment category
August 26, 2015

An insight in the equity income scheme category that offers capital appreciation along with downside protection thereby making it seemingly less volatile in comparison to pure balanced funds.

Author : iFAST Research

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The maiden budget of the Modi government made debt funds unattractive from the taxation point of view. The period of holding a debt fund increased from 12 months to 36 months if the investor wanted to avail the benefit of long term capital gains. This meant that investors with a time horizon of 12 months to 18 months and a goal of parking their short term surplus in fixed income were left in the lurch by this sudden decision of the government. In this scenario, fund houses found a solution for these investors by launching Equity Income/Equity Savings Fund, which is an asset allocation model consisting of Equity + Arbitrage + Debt instruments. This category of funds has become the new trendsetter in the industry with investors showing a lot of interest in taking an exposure into the same.

These funds try to maintain a 65% allocation into the equity space while parking the rest in fixed income instruments. The equity portion is structured in such a way that the surplus is allocated into direct equities and arbitrage opportunities such that the total equity exposure comes to ~ 65%. The allocation into equities allows investors to take advantage of equity taxation; wherein capital gain tax is nil after a year. The given illustration discusses arbitrage in detail:



This category of funds is suitable for investors that have a conservative risk profile but still want to be a part of the capital appreciation provided by equities. It is also an ideal category for investors who would normally park their funds in fixed deposits with a time horizon of 3 years. Unlike a fixed deposit, these funds do not give assured returns, yet in a falling interest rate scenario, the investors would be better off parking their surplus into this category over fixed deposits. This is because a small addition of equities in the portfolio will generate alpha for investors in a scenario wherein the markets are expected to perform well despite the short term fluctuations.

In the current scenario, an investment in a 3 year Fixed Deposit in ICICI Bank would yield 8%. Now let us assume that this category of funds would also deliver 8% over a period of 3 years. In this case, the maturity value after 3 years is given below.


Our Take

Downside Protection + Capital Appreciation is the USP of this category of funds. An asset allocation model with an exposure in direct equities and arbitrage will mean less volatility in this category as compared to a pure balanced fund.. Another advantage of t is that the rebalancing between the asset classes is done by the fund manager himself and as such the investor need not worry about the exit loads and taxation hassles. As these funds do not have a track record, we will have to give them some time before we can judge their performance across market cycles.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.

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