Markets have taken a nose dive in the last 10 days due to US-China trade tariff wars, election outcome and selling by foreign portfolio investors. The India Volatility Index or the fear gauge VIX is hovering around the 28-29 mark, making stock market investors nervous due to the election linked syndrome.The VIX has been climbing higher ahead of the Lok Sabha elections outcome and many analysts are expecting the VIX to test the higher range of 34-36 levels in the next few weeks on the back of increase in “out of the money Put and Call transactions”. Money which was moving to debt funds has also slowed down due to defaults and deferment of maturity by various corporates. Hence, money is moving to bank fixed deposits as during these uncertain times investors want their capital protected and sentiment will be the main driver of the market during the months of May and June. (Learn more about Lok Sabha elections here)
The Answer: EQUITY SAVING MUTUAL FUNDS
One can use equity savings mutual funds to tackle the volatility and uncertainty in the stock market. The portfolio mix of equity, debt and arbitrage tries to protect the downside risk. Equity savings funds invest in equity, arbitrage and debt. They can invest a minimum of 65% in equities, including arbitrage positions, and a minimum of 10% in debt.
If you look at the last one year return in the current volatile times, you will see that while most equity categories have given negative returns, equity savings schemes have delivered positive returns. The data will make it clear how this category uses the arbitrage opportunity to defeat other equity categories in volatile markets.
In the last one year, the top performing fund in the small category has given -4.42%, the best performing mid cap fund has generated -1.42%, the best performing actively managed large cap has given 5.57%, best multi cap fund has generated 3.89% and the best equity savings fund has given 5.45% in the same time period.
Another big advantage of equity savings funds is the taxation. These schemes are treated as equity schemes for the purpose of taxation. Short term capital gains on investments of less than 12 months are taxed at 15% and the long term gains exceeding Rs 1 lakh on investments held for more than 12 months are taxed at 10%.
The equity taxation makes the category a better option than liquid and ultra-short term funds to park money for a shorter period and shifting money through a systematic transfer plan (STP) to other equity funds. Short term gains in debt funds held for less than 3 years are added to income and taxed as per the tax slab of the investors.
NOTE: These funds are not meant to generate high returns but to protect the downside. Investors can expect 9 to 11% returns in a good market. They can expect a maximum of 14%
In the past these schemes would have given much higher returns, but that was due to some micro economic factors. Investors should not be influenced by the abnormally high returns as the ‘reversion to mean’ will play and bring back the returns to the normal.
CONCLUSION: Whenever there is a stock market correction, investors should also increase their equity allocation in a systematic manner in a fund or stock of their choice. One should also stay invested in their mutual fund scheme as per their financial goal, asset allocation and risk profile as in spite of the volatility as trying to cash out is not an easy option to safeguard the investment.