Mid-sized fund house Mirae Asset Mutual Fund has come up with a new fund offer (NFO), Mirae Asset Equity Savings Fund, an open-ended hybrid scheme investing in equity, arbitrage, and debt. The NFO opens on November 26 and will close on December 10. It will reopen for continuous sale/repurchase from December 18.
Equity savings funds aim to deliver returns higher than debt funds with risk lower than pure equity funds. This is done through a judicious mix of capital appreciation and regular income channels. The Mirae fund is set to be the latest addition to the 20 existing products in the equity savings funds space, after Union MF, Franklin MF, UTI MF, and Sundaram MF launched their own offerings this year itself. We review the NFO here, and have a look at RupeeIQ’s take on the offering at the end of the article.
Equity savings fund structure
Equity savings funds typically invest in debt, arbitrage, and equity. Mirae Asset Equity Savings Fund has targeted an allocation to equity at 20-45%, arbitrage at 20-70% and debt + money market instruments at 10-35%. This would be for normal market conditions. When the fund wants to play defensive, it would aim to have 10-40% for equity & equity related instruments (unhedged), arbitrage at 0-55% and fixed income instruments at 35-85%. The objective is to generate a moderate risk-return profile.
To be tax-efficient, an equity savings fund needs to have a gross equity exposure of at least 65%. This would allow the fund to enjoy equity taxation which is much more tax friendly than taxation of debt funds. All this should, in the ideal world, generate more stable returns than pure equity funds. We must remember that the next 6-12 months would be volatile for stocks. So, a pure equity approach could catch you off-guard. Equity savings funds are ideal for an investment horizon of three years.
Let us take you through the equity, arbitrage and debt strategy that Mirae Asset Equity Savings Fund seeks to employ.
In equity (20-45%), the scheme plans to focus most of its resources on large-caps as it wants the stability of returns. Allocation to mid-caps and small-caps would be a lot lesser, and that would depend on better growth outlook and valuation gaps with large-caps. The focus on large-caps is a better strategy than the multi caps strategy taken by some other equity savings funds.
In the arbitrage portion (20-70%), the fund will employ the cash-futures arbitrage strategy. This is a common and popular way. Do remember that the equity arbitrage exposure is not an exposure to equity market volatility. The equity arbitrage investments can generate returns that are akin to the prevailing short-term interest rates.
In terms of debt (10-35%), the fund says it will invest in highly rated debt and money market instruments. Returns generated from the fixed income assets should be far less volatile and more stable.
The IL&FS debt event – Do note that Mirae was one of the 13 fund-houses that had some exposure to IL&FS as on Aug-2018. After the news of IndusInd Bank acquiring IL&FS Securities Services Limited was made public, Mirae had bought Commercial Paper of IL&FS Securities Services Limited in July 2018 as it relied on the credit quality of IndusInd Bank. The Commercial Paper (CP) of IL&FS Securities Services Limited in which Mirae Asset Cash Management Fund had invested, matured on 10th September, 2018 and the payment was duly received by the fund; hence there was no impact on NAV. However, Mirae’s liquid/money market schemes AAUM dropped by 18% between August and October, probably because some investors pulled out money. Read more about the winners and losers in liquid funds churn in this article.
Fund Managers – Sudhir Kedia (Equity portion) & Mahendra Jajoo (Debt portion). Kedia already manages the equity portion of the Mirae Asset Hybrid Equity Fund (erstwhile Mirae Asset Prudence Fund). Mahendra is the Head – Fixed Income of Mirae MF.
Benchmark index – Nifty Equity Savings Index. This index has a 35% exposure to Nifty 50 TRI; 30% exposure to equity arbitrage; 30% exposure to Nifty Short Duration Debt Index, and 5% exposure to NIFTY 1D Rate Index.
Investment – Minimum investment amount for a lump sum is Rs 5,000. In case of Systematic Investment Plan (SIP), the minimum is 5 instalments worth monthly/ quarterly of Rs 1,000.
Exit Load – For investors who have opted for SWP under the plan: There is no exit load for redeeming 15% of the units allotted (including Switch-in/ STP – in) on or before completion of 365 days from the date of allotment of units.
Any redemption in excess of such limits in the first 365 days from the date of allotment shall be subject to 1% exit load if redeemed within 1 year (365 days) from the date of allotment. If redeemed after 1 year (365 days) from the date of allotment, there is no exit load.
For Investors who have not opted for SWP under the plan (including Switch out, STP out), you have to pay 1% exit load if investments are redeemed within 1 year (365 days) from the date of allotment. There is no exit load if they are redeemed after 1 year (365 days) from the date of allotment.
Taxation – Investors are liable to pay the long-term capital gains (LTCG) tax at 10% (plus surcharge, if applicable and cess) without indexation on gains if units held for more than 12 months are sold. The short-term capital gains (STCG) tax is at 15% (plus surcharge, if applicable and cess) on gains if units sold are held for less than 12 months.
RupeeIQ take – Mirae Asset Equity Savings Fund is for investors with a moderate risk-return profile and with an investment horizon of two to three years. Data shows that equity savings fund return across the industry for three year period varies between 5% to 9% at present. Over five and 10 year periods, the return range is 6-10%. The product has the dual advantage of steady returns/ low volatility with tax efficiency of equity funds. In this way, equity savings funds can generate higher post-tax returns than debt funds if held up to three years. Stock selection and investment strategy changes will be key.
Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.