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Equity saving schemes fell 11% in one month. Time for conservative investors to rethink?

​Equity saving schemes are sold as `one of the safest’ investment products. A typical sales pitch goes like this: “look at the portfolio. It is debt, arbitrage, and a little bit of equity.

, ET Online|
Last Updated: Apr 02, 2020, 10.52 AM IST
Equity saving schemes are sold as `one of the safest’ investment products. A typical sales pitch goes like this: “look at the portfolio. It is debt, arbitrage, and a little bit of equity. And you also get equity taxation. It is a win-win situation for conservative investors.” However, the ongoing bloodbath in the stock market following the coronavirus pandemic has laid bare the claim.

The equity saving category has fallen 11.37% in the last one month and -12.59% in the last three months after the stock market started reacting to the spread of COVID-19 across the globe. Obviously, many conservative investors who had chosen these schemes to earn a little extra post-tax return are now nursing second thoughts about their investments in these schemes. Sadly, mutual fund advisors say there is no going back now for these investors.

According to Sebi mandate, equity saving schemes must have a minimum of 65% allocation to equity and equity-related instruments (including arbitrage positions) and 10% to debt. HDFC Equity Savings Fund, the largest scheme in the equity savings category, has 36.1% exposure to equity, and 22.7% to debt. It is also sitting on cash

“A portfolio with 65% equity can never be suitable for a conservative investor. Sadly, there are a number of investors who pick ‘hybrid funds’ based on their past returns. Just because equity savings might give higher returns than conservative hybrid, they would pick them. Here’s where they make a mistake. But now is too late to reconsider this choice,” says Puneet Oberoi, Founder, Excellent Investment Advisors, a mutual fund distribution firm, based in Delhi.

The schemes in the equity saving category have fallen between -4.20% to -18.10% in the last one month, which is huge, considering many investors use these schemes for short-term goals. This brings back the debate of whether investors should choose hybrid funds for their short-term goals?

“I have always said that hybrid funds are not the best for investors with different goals and plans. If you can, please invest in equity and debt separately. If you have a goal less than 5 years, you can’t even afford to have 15% equity in the scheme, forget about 65%. Equity saving schemes are very wrongly perceived by many investors,” says SR Srinivasan, Founder, SriNivesh, a wealth management firm, based in Bengaluru.

A quick look at the portfolios of a few schemes in this category has revealed that schemes like Nippon India Equity Saving Fund and DSP Equity Savings Fund have a pure equity exposure of 48%. Mutual fund advisors warn investors to stay away from such schemes specifically if they don’t have the right investment horizon and risk appetite.

“See, 10% debt portion is not going to cushion 60-80% equity, even 40% equity for that matter. It cannot. When equity falls, you will bear the brunt. So, be cautious. If you have to choose a hybrid scheme, and you are a conservative investor, use the Sebi nomenclature and invest in conservative hybrid schemes. They have a cap to the equity exposure. Regardless, even for conservative hybrid schemes, you should have five years in your hand,” says Puneet Oberoi.

So, if you don’t have five years to invest, mutual fund advisors believe that you should stick to debt schemes. They also caution investors to stay away from high risk-high return debt schemes. “If you have a goal to achieve in less than four years, you should stick to debt schemes. This is basic. Don’t go for long duration funds or credit risk funds. Stick to short duration, liquid, corporate bond funds etc,” says SR Srinivasan.

These advisors believe that if you have already taken the hit in these schemes, don’t rush to exit in haste. Before taking a final call, calculate your tax liability and loads if any. Consult an advisor if you don’t understand the concepts fully.

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