Building Wealth is simple if its fundamentals are understood!!

There are some commonly talked parameters that one has to keep in mind while embarking on a financial journey of building wealth. These are, time horizon – wealth building needs time, like a tree it takes time and patient nurturing before it blooms and gives fruits. Next is good understanding of one’s risk appetite and risk profile of the chosen investment. Wrong assessment or understanding of any of these could make subsistence of an investment, over long period, particularly during volatile time, almost impossible.

While these are at most important, tax efficiency of the investment is another important aspect, tax saved is the money earned. Therefore, one has to be well aware of tax aspects of all investments.

Toady we will talk about Equity Saving Funds, the tax efficient investment for those looking for moderate risk investment with reasonable reruns.

What is an Equity Saving Scheme?

Equity savings fund essentially invest in equity, debt and arbitrage opportunities. This Arbitrage component sets them apart from other hybrid funds. Essentially, the Arbitrage is about exploiting the pricing inefficiencies in the cash and derivatives segments of the equity market. Thus, the fund’s overall equity exposure is partially hedged, reducing its volatility as compared to an aggressive hybrid fund, where the equity exposure is fully unhedged.

Equity savings funds score over pure equity and aggressive hybrid funds on risks because of their downside protection while their equity exposure enables them to generate potentially higher returns compared with bank fixed deposits with greater tax efficiency. Their diversification makes them an attractive option for investors with a moderate risk profile, who want capital appreciation and a steady income. However, it is imperative to understand that returns of these funds are linked to arbitrage opportunities, which may not always be available in the market. Also, the underlying unhedged equity portion is exposed to the vagaries of the equity market and hence impacts the returns. Hence, investors must do proper due diligence before investing in them.


Thus, it’s clear that diverse components of these saving schemes serve different purposes. For instance, the equity portion of this scheme provides for capital appreciation and superior return to beat inflation, while debt and arbitrage portion of this scheme acts as a cushion to minimise the downside of market fluctuations.

For example, let’s say an investor has held an Equity Savings Scheme for six months, succeeding which the portfolio has shed about 10% of the value. Now, if the debt segment of the scheme generates about 6% annual returns and the arbitrage segment bring about 6.5% returns, then the investor’s loss will be minimised to an extent.

Thus, cumulative return from ESS will only reduce marginally even with the 10% market decline. Whereas, balanced funds or equity market schemes would have generated negative returns, the quantum of which would have depended on the type of stocks in said portfolio.


With this scheme, a specific portion of the equity is considered as security to maximise the returns from an investment portfolio. Thus, this equity, along with the derivative exposure, is cumulatively considered to be equity allocations, and as a result, these funds are treated as equity assets.

These details are for knowledge purpose and one is advised to conduct detailed study of the fund class or consult qualified financial advisor before making investment and return mentioned in the article are purely indicative for the purpose of illustration, actual return could be different in different schemes.