Thursday, November 26, 2015
by
Indian Real Estate News
Newly introduced equity-income funds are like balanced funds but they are also low on risk as well as taxes. This makes them real balanced funds
Driven by India's tax rules, balanced funds have become too equity-heavy and risky. Now, there's a new type of balanced fund that combines tax efficiency with a more conservative, safer exposure to equities.
This new animal in the zoo of Indian mutual funds goes under the rather odd name of 'equity-income fund'. Experienced investors would find the name a little puzzling because all hybrid funds, like balanced funds or MIPs, have both equity and income parts and could justifiably be called by this name.
High risk, low taxation: Let's see what's new about these so-called equity-income funds, and how they deliver lower risk while having the same lower tax liability as regular balanced funds or equity funds. Experienced investors know that under our tax laws, capital gains from equity investments are zero if you stay invested for more than one year. To qualify as an equity investment, a mutual fund must invest more than 65 per cent of its assets in equity. If the equity exposure drops below this level, then the risk will be lower, but investors will have a heavier tax liability, as is for any income fund.
Low risk, low taxation: That's where the new equity-income fund comes in and delivers lower equity exposure, combined with the lower taxation of equity funds. They do this by utilising equity derivatives in such a way that the returns are predictable and safe, while the investment is still classified as equity for tax purposes. Therefore, if one creates a balanced fund where some of the equity exposure is in the form of arbitrage trades, then one gets the very useful combination of lower risk and lower tax.
Proof of the pudding: There are now ten such funds. They haven't even completed one year yet. The highest return from an equity-income fund is a modest 8.66 per cent. However, the interesting part is how they contained the recent slip in the equity market. The median of the worst one-week performance since launch is -2.48 per cent. The median of the worst one-month performance is -3.49 per cent (as of October 9, 2015). Compare these numbers with the worst one-week and the worst one-month performance of balanced funds. The median of the worst one-week performance of balanced funds is -14.25 per cent and that of the worst one-month performance is -25.33 per cent (as of October 9, 2015).
Loophole: Of course, investors should be aware that by investing in these funds, they are exploiting what is basically a loophole in tax rules. It may continue like this for years. But the risk that tax authorities may address it at some point is always there.
How they have done so far
| Schemes | Ret 1 month* | Worst 1-month ret* | Assets (Rcr) | Unhedged equity* | Hedged equity* |
| Axis Equity Saver | 1.83 | -1.2 | -- | -- | -- |
| Birla SL Equity Savings | 1.16 | -3.1 | 344.69 | 66.95 | 7.1 |
| DWS Equity Income | 1.31 | -4.23 | 24.19 | 18.61 | 46.07 |
| ICICI Pru Equity Income | 3.27 | -3.39 | 536.1 | 31.69 | 35.77 |
| JP Morgan India Equity Income | 1.2 | -2.63 | 629.17 | 29.05 | 37.8 |
| Kotak Equity Savings | 1.37 | -2.01 | 729.84 | 23.42 | 39.85 |
| L&T Equity Savings | 1.09 | -3.59 | 56.8 | 27.43 | 41.86 |
| Reliance Equity Savings | 1.52 | -4.42 | 658.68 | 38.54 | 28.31 |
| SBI Equity Savings | 1.69 | -3.65 | 134.2 | 59.22 | 1.2 |
| Tata Regular Saving Equity | 0.89 | -3.83 | 43.76 | 33.79 | 36.68 |
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. IDFC Tax Advantage (ELSS) Fund
4. ICICI Prudential Long Term Equity Fund
5. Religare Tax Plan
6. Franklin India TaxShield
7. DSP BlackRock Tax Saver Fund
8. Birla Sun Life Tax Relief 96
9. Reliance Tax Saver (ELSS) Fund
10. HDFC TaxSaver
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Good Returns by Investing in ELSS Mutual Funds Online
Invest in Tax Saver Mutual Funds Online
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