SBI Equity Savings Fund: A good hybrid fund in volatile markets

SBI Equity Savings Fund was launched in May 2015 and has Rs 2,275 Crores of Assets under Management. The expense ratio of the fund is 1.72%. For redemption of units within 15 days, the fund will charge an exit load of 0.1%. The scheme has given 8.4% CAGR returns since inception. Considering the volatility of the scheme, which is much lower compared to other equity oriented hybrid funds, these are reasonably good returns. Nidhi Chawla, Neeraj Kumar and Mansi Sajeja are the fund managers of this scheme.

What are equity savings funds?

Equity savings funds are hybrid mutual fund schemes which invest in equity, debt and arbitrage (using derivatives). As per SEBI, overall equity allocation (including hedged and un-hedged exposures) should be minimum 65%. SEBI also requires minimum 10% asset allocation to debt and money market instruments. One of the biggest advantages of equity savings funds is that it enjoys equity taxation.

How equity savings funds work?

• Arbitrage: Arbitrage by definition is defined as risk free profit, by exploiting price differences of the same underlying asset in different market segment e.g. cash and F&O markets. In arbitrage strategy you will take long (buy) and short (sell) position of the same stock in cash and F&O market respectively. If the price of the stock in F&O market is higher than the price in cash market, you will be able to lock in risk-free profits. Capital safety, returns and liquidity are important considerations in arbitrage strategy.


• Debt: Debt exposure of Equity Savings funds can range from 10 to 35%. The debt allocations of these schemes generate income, reduce overall volatility and provide stability to the scheme. The debt allocation depends on prevailing bond yields and also arbitrage opportunities in the equity market. In bear markets, when the futures premium falls, arbitrage opportunities narrow and equity savings funds may invest up to 35% in debt.


• Active Equity: This is for capital appreciation. Equity savings funds take active (un-hedged) net equity exposure within specified allocation ranges. When fund manager are bullish on equities they increase active (un-hedged) equity exposure to the upper end of the range. The fund manager, however, has the flexibility to reduce the equity allocations and increase exposures to arbitrage or debt if volatility increases in the stock market.

Performance of SBI Equity Savings Fund

Had you invested Rs 10,000 in SBI Equity Savings Fund 3 (three) years back,you investment would have grown to Rs 13,463. The scheme gave 10.39% CAGR returns over the last 3 (three) years. Source:www.advisorkhoj.com

Drawdown-Limited Downside Risk

The table below shows the biggest market drawdowns since the launch of SBI Equity Savings Fund. You can see that the scheme was able to limit drawdowns for investors.

SIP Returns

The chart below shows the returns of Rs 10,000 monthly investment in SBI Equity Savings Fund over the last 3 years (ending 24^th March 2022). With a cumulative investment of Rs 3.6 lakhs, the SIP value would have grown to Rs 4.32 lakhs; the annualized SIP return (XIRR) was 12.21%.

Source: Advisorkhoj

Taxation of equity savings funds

Short term capital gains (investment holding period of less than 12 months) in equity savings funds are taxed at 15% plus applicable surcharge and cess. Long term capital gains (investment holding period of more than 12 months) are tax free up to Rs 1 lakh and taxed at 10% plus applicable surcharge and cess thereafter.

Should you invest in equity savings funds now?

• The ongoing war in Ukraine and sanctions on Russian exports has sent commodity prices soaring. Further surges in crude oil prices may cause volatility in equity markets.


• The stance of central banks, especially US Federal Reserve has turned hawkish. The market so far has taken the Fed’s actions in its stride, but the pace of interest rate increases can have an impact on volatility.


• FIIs have been selling relentlessly for the last few months; DII buying has supported the market till now. It remains to be seen how resilient DIIs remain in the face of FII selling.


• Considering the near term risk factors, investors who do not have high risk appetites can invest in equity savings funds with minimum 3 year investment horizons.


• Since equity prices have corrected from its all time high, you can get net equity exposure at reasonably attractive valuations and still have risk protection through hedging and asset allocation by investing in Equity Savings Funds.

Who should invest in SBI Equity Savings Funds?

• Investors who are looking for higher returns compared to traditional fixed income investments with relatively lower volatility compared to equity or equity oriented funds may invest in SBI Equity Savings Fund.


• Investors who want limited downside risks in volatile markets.


• Investors in higher tax brackets, who prefer equity taxation


• Investors with moderate to moderately high risk appetites.


• Investors with minimum 3-5 year investment horizons.