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What is an Equity Savings Fund and How Does it Differ From ELSS Funds?

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What is an Equity Savings Fund and How Does it Differ From ELSS Funds?

An equity savings scheme is a type of hybrid mutual fund that distributes your investments among equity, debt, and arbitrage funds. However, this division isn’t random – approximately 30-35% of the amount is reserved for equity and equity-related investments, while the remaining goes towards arbitrages as well as debt funds.

Being relatively new to India, this scheme is gathering popularity because it diversifies your portfolio and aims to mitigate the risks associated with stock market investments. Compared to more aggressive hybrid funds like equity-linked savings schemes (ELSS), where the equity exposure is extremely high, equity savings schemes (ESS) feature a moderate risk profile and are worth considering if your goal is to create wealth and generate a steady income.

Differences Between ESS and ELSS Mutual Funds

The comparison below will help you understand how these two investment options differ and which one’s more viable for your specific objectives:

Equity Savings Schemes FundsEquity Linked Savings Schemes
MeaningESS Funds are a class of hybrid mutual funds that invest in debt, equity, and arbitrage.ELSS funds are equity mutual funds that invest heavily in equity or equity-related instruments.
Lock-in periodThere is no known lock-in period for ESS funds.There’s a mandatory lock-in period of 3 years.
PurposeESS funds can fulfill different kinds of objectives for investors, such as:1. Investing a portion of the amount in equity allows you to build wealth and take advantage of the volatility of the stock market.2. Since a majority of the amount is reserved for debt and arbitrage, your capital is partially shielded from the ups and downs of the stock market, thus minimizing risk exposure.3. Therefore, the ultimate purpose of the scheme is to provide a relatively stable stream of returns, but without putting your whole capital at risk.ELSS funds are primarily used for the following purposes:1. They are also known as tax-saving schemes as they offer exemptions up to Rs. 1,50,000 of the annual income under Section 80C of the Income Tax Act.2. Since a minimum of 80% of the total investable amount goes towards equity and equity-related instruments, ELSS funds are intended to help you meet long-term financial goals along with tax-saving. Equity investments can be a risky endeavor with a high return potential, making this scheme ideal for investors with greater risk tolerance.
Portfolio diversificationESS funds invest approximately 30 to 35% of the capital into equity and equity-related assets, while the rest goes towards debt income funds and arbitrages.ELSS funds invest the majority of the sum in equity. Within that, they invest in diverse market capitalizations, from small-cap to large-cap companies in a variety of sectors.
ArbitrageESS funds invest part of your capital in arbitrages, which is the process of buying and selling assets across platforms or locations to make a profit from the price difference.ELSS funds do not invest in arbitrage and are mainly concerned with equity or the stock market.
Risk profileLow to moderate riskModerate to high risk

Conclusion

Whether you choose to invest in equity savings funds should depend on your risk tolerance and financial objectives. Before you invest, make sure to compare different ESS funds on the Tata Capital Moneyfy App to find out which one will help you fulfil your goals.

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