Equity Savings Funds: Where to invest during volatility as polls approach

Historically, volatility in the Indian stock market tends to increase as elections approach, as reflected by the India VIX Index (VIX) in 2009, 2014, and 2019.

Equity Savings Funds, a type of hybrid mutual fund, could be a suitable option for investors seeking some protection against volatility during this time, said Mirae Asset mutual fund in a note. 

In India it’s been observed as rundown to election comes nearer, the volatility in the market increases due to various factors. As can be seen through India Volatility Index (VIX Index) across 2009, 2014 and 2019 general election period.  Amid elevated volatility it becomes difficult to navigate the market, here a strategy like Equity Savings Fund could be useful," it said.

These funds combine three asset classes in their portfolio:

Equity: Provides long-term wealth creation potential, but also carries higher volatility.
 

Arbitrage: Aims to capitalize on price discrepancies between cash and futures markets, offering lower risk than pure equities.
 

Fixed Income: Offers relatively stable returns with lower volatility compared to stocks.
 

For any mutual fund to have equity taxation a minimum 65% of net assets must be invested in equity or equity related instruments. The net equity levels range somewhere from 15% to 45% and remaining is invested in arbitrage. So, for example if Net Equity levels of an Equity Savings Fund is around 20%, minimum 45% would be in arbitrage. Remaining 35% could be allocated to fixed income or arbitrage as well.

Benefits of Equity Savings Funds:

• Diversification: The combination of asset classes helps mitigate risk, especially during volatile periods.
• Downside Protection: The presence of arbitrage and fixed income components can potentially provide a buffer against sharp market declines.
• Suitable for Conservative Investors: These funds cater to investors with a moderate risk appetite who prioritize some capital protection.

Considering Equity Savings Funds Now:

High Interest Rates: Current high interest rates make fixed income investments attractive, which is one of the components of Equity Savings Funds.
 

Election Volatility: The upcoming elections and potential market volatility make arbitrage opportunities more enticing, another component of these funds.
 

Long-Term Wealth Creation: Equity, though volatile in the short term, remains a key driver of long-term wealth growth.

Why Equity Savings Fund? 

• At new highs, retail investors, especially the conservative ones, find it challenging to enter the market and allocate across

assets.
 

• The recent rate pauses by the Reserve Bank of India (RBI) and the Federal Reserve suggest that interest rates may be

peaking. Adding to all these, recent taxation changes in debt funds have made asset allocation even more complex for

retail investors.
 

• In this regard, equity savings funds from the hybrid category may be considered by investors with a modest risk appetite

looking for downside protection.
 

• Apart from equity and debt, these funds use equity arbitrage via derivatives to reduce risks and potentially generate better

inflation adjusted returns.
 

• These funds are suitable for those who cannot withstand too much volatility in the value of their investments