NFO review - Sundaram Equity Savings Fund plans 3-pronged strategyEquity savings funds are a type of hybrid mutual fund scheme. They invest in debt, equity and arbitrage positions. All this is done in a bid to provide returns higher than debt funds with risk lower than pure equity funds. Joining the 19-strong bandwagon of equity savings funds is Sundaram MF.

The niche fund-house is launching the new fund offer, Sundaram Equity Savings Fund, on November 16, 2018 and the offer closes on November 30, 2018. The scheme then reopens for ongoing subscription from December 14 onwards. The product may be suitable especially for investing in volatile and uncertain market conditions for investors with low to moderate risk appetite. RupeeIQ helps you understand about this product. Read on.

Equity savings

Equity Savings Funds (ESFs) invest in debt, arbitrage and equity but the minimum gross equity allocation is 65%. The gross equity portion is partially hedged thereby reducing the equity exposure (to about 33% of overall pie).

Hedging is done mostly through income generating arbitrage trades to reduce risk. The debt portion along with arbitrage plays generate income. The unhedged equity is expected to provide capital gains.

ESFs are tax efficient. Since gross equity exposure is at least 65%, these funds enjoy equity taxation which is much more tax friendly than taxation of debt funds.

So, equity savings fund is for investors seeking debt-like returns with an equity kicker. An added feature is equity taxation benefit.

Equity Savings Funds positioning

Feature Fixed Deposits Fixed Income Conservative Hybrid Equity Savings Fund Aggressive Hybrid Equity
Returns Fixed Steady Steady Steady Possibility of high returns Possibility of high returns
Volatility None Low / Medium Low / Medium Low / Medium High High
Tax Efficiency Inefficient Efficient if held for 3 years Efficient if held for 3 years Tax efficient Tax efficient Tax efficient
Holding period 1 month to 5 years Over 3 years Over 3 years Around 3 years Over 3 to 5 years Over 5 years

Sundaram USP

Sundaram Equity Savings Fund has a three-pronged strategy. One, controlled growth through gross equity investment that will be primarily large cap stocks oriented. Two, arbitrage plays will primarily be in individual stocks. Arbitrage generates income if there is price difference between spot and futures price. Three, stable income through debt by way of high credit quality portfolio (AA+ and above).

If you already have exposure to hybrid funds, think of Sundaram Equity Savings Fund somewhere between conservative hybrid funds and aggressive hybrid funds.

Why this product

Sundaram Equity Savings Fund is for investors who have an investment horizon of around three years. Historically investment in fixed income funds would have been the preferred mode, but post-tax returns of fixed income funds is not that great (it’s higher than bank FDs but quite lower than pure equity funds). But investing in pure equity funds for less than three years leads to greater unpredictability of returns. So, on one side you have fixed income’s lower post-tax returns while on the other side equity funds are tax-efficient but can be very volatile.

So, the ideal solution for somebody with three years horizon is an equity savings fund. 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 up to three years.

Benchmark

Sundaram Equity Savings Fund will be benchmarked against the Nifty Equity Savings Index, which has a 35% exposure to Nifty 50 TRI; 30% exposure to equity arbitrage (long position in Nifty 50 TRI and equivalent short position in Nifty 50 Futures Index); 30% exposure to Nifty Short Duration Debt Index & 5% exposure to NIFTY 1D Rate Index.

Exit load

Exit Load for redemption within 12 months from the date of allotment is 1%. Exit load for redemption on or after 12 months from the date of allotment is nil.

Fund Managers

The scheme will be managed by S Krishnakumar & S Bharath (Equity) and Dwijendra Srivastava (Fixed Income).

Investment

For NFO, the minimum application amount is Rs 5,000.

For SIP, the minimum weekly amount is Rs 1,000, minimum monthly sum is Rs 250 and minimum quarterly investment is Rs 750.

RupeeIQ take – Sundaram Equity Savings Fund will give you lower return than balanced fund over a long period of time but it has far greater stability. Also, the tax treatment will be like that of an equity fund. Data shows that equity savings fund return across the industry for three year period varies between 3% to 10%. Both credit and stock selection will be key to get stable returns.

Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.