Equity savings funds are hybrid mutual fund schemes that typically allocate investments across three avenues: equities, debt, and arbitrage opportunities, with about 30–35 per cent each in the portfolio.
By combining arbitrage and equity components, these funds ensure over 65 per cent exposure to equity instruments, enabling them to qualify for favourable equity taxation. This makes them attractive to conservative investors seeking better returns than fixed income without taking on substantial equity risks. The equity savings category sits between conservative hybrid funds on the low-risk side and balanced advantage funds on the higher-risk side.
Among the better performers in this category is Sundaram Equity Savings Fund (SESF), which has delivered a compounded annual return of 8.7 per cent over the past 10 years.
Dynamic asset allocation
The fund’s Scheme Information Document (SID) prescribes a 65–90 per cent allocation to equity plus arbitrage positions, with net equity exposure set between 15–50 per cent. To decide the allocation between equity and debt, the fund applies a dual-parameter model that blends Price-to-Book (PB) and Price-to-Earnings (PE) ratios of the BSE 200 index on a trailing 12-month basis, assigning 50 per cent weight to each. The allocation is inversely linked to market valuations: when PB and PE are elevated, equity weight reduces while debt increases, and vice versa.
Earlier, the fund relied solely on PE. However, given its volatility during downturns, PB was added for stability. Book value, being less erratic than earnings, prevents excessive equity cuts during temporary disruptions such as earnings collapses in crisis periods.
Once the PB–PE model fixes net equity within the 15–50 per cent band, the balance flows into arbitrage. This portion is determined by prevailing spreads — attractive spreads push allocation toward the higher end, while weaker spreads keep it closer to the minimum. In the latest portfolio, long equity stands at 74 per cent with net equity at 38 per cent, implying a 36 per cent arbitrage allocation. Overall, the gross equity exposure typically stays within the 70–75 per cent band, with the balance deployed into debt and cash.
The fund’s stock selection rests on four pillars: supportive enablers such as favourable policy and regulation, management quality with proven execution, strong business fundamentals assessed through competitive moats and Porter’s five forces, and valuations that ensure prudent entry levels.
Currently, the fund is underweight in utilities, metals, and IT, while overweight in financials (banks and NBFCs), automobiles, and telecom. The equity portfolio is tilted heavily toward large-caps at around 78 per cent, followed by 17 per cent in mid-caps and 5 per cent in small-caps.
On the debt side, the fund follows an accrual-based strategy, avoiding high duration risk by focusing on short-term government securities, money market instruments, and only AAA-rated corporate debt. Over the past five years, the Macaulay Duration of the debt portfolio has ranged between 0.4 and 3.5 years.
Performance
The fund outperformed peers with stellar returns in 2023 and 2024, largely supported by its higher exposure to mid and small-caps. However, year-to-date performance has been below the category average as the portfolio transitioned from a mid and small-cap tilt to a more large-cap-oriented stance. The fund manager explained that, given the fund’s conservative approach, the shift was prompted by concerns over slowing earnings momentum in mid and small-caps, coupled with valuations that appeared stretched relative to the earnings outlook for the next two to three years.
An analysis of three-year rolling returns over the last seven years shows that the fund delivered an average annual return of 12.3 per cent, way ahead of the category average of 9.5 per cent. Its three-year returns have ranged between 9.2 per cent and 16.8 per cent.
The regular plan has an expense ratio of 2.15 per cent, significantly higher than the category average of 1.7 per cent. However, the direct plan is cost-efficient at 0.61 per cent, lower than the category average of 0.7 per cent. For investors, a minimum investment horizon of three to five years is ideal to benefit from the fund’s stability and tax efficiency.
Published on September 20, 2025