As India’s equity markets march from peak to peak, asset management companies (SMCs) are trying to woo conservative investors with a new set of hybrid funds called equity income funds that are being billed as safe but tax efficient.
These funds invest in long-term equity, debt as well as equity arbitrage opportunities, making them safer than pure equity funds to investors shun risks and prefer to invest in debt funds.
At the same time, these hybrid funds get the benefit of the one-year lock-in rule for claiming exemption from capital gains tax. The lock-in timeframe to claim capital gains on fixed income funds was increased from one year to three years in the Budget.
Since the overall equity exposure (including arbitrage) at any given point of time is at least 65%, the schemes are classified as an equity fund—which means that if a person remains invested for over a year, the returns will be exempt from long-term capital gains tax.
ICICI Prudential and Birla Sun Life are two AMCs to launch such schemes in November. Earlier this year Kotak Mahindra and JP Morgan too launched similar schemes.
In ICICI Prudential’s Equity Income Fund, 20%-40% of the funds are invested in long-term equity, 25%-35% in debt, money market instruments and cash, and the rest in equity and related arbitrage opportunities. In Birla Sun Life Equity Savings Fund, 20%-35% is in fixed income and 65%-80% rest in equity and equity arbitrage opportunities.
Arbitrage opportunities are exploited by buying or selling a stock in the spot market and correspondingly taking the opposite stand in the futures market and making gains depending on the price differential. Such opportunities generate safer rate of returns, say analysts.
According to A Balasubramaniam, CEO of Birla Sun Life AMC, hybrid funds give better returns than a fixed deposit, and are also more tax efficient compared to a pure debt fund and are suitable for conservative investors.
“Currently, investors are either taking more risk than they can tolerate and investing in balanced funds, or are taking no risks and booking fixed deposits. By investing in equity income funds, investors can expose themselves to the right level of risk and avail an opportunity to make tax efficient gains,” said Supreet Bhan, executive director, and head of retail sales at JP Morgan AMC.
ICICI Prudential’s equity income fund will use in-house price-to-book (P-B) model to maintain the equity allocation as per market conditions, said Nimesh Shah, MD and CEO, of ICICI Prudential AMC. “Based on the P-B model, the scheme will decide the attractiveness or expensiveness based on market valuations. The fund seeks to raise the net long equity exposure when markets are attractive and book profits,” he said.