Equity income funds are hybrid products that offer an exposure to arbitrage opportunities within equity. Read on.
Mutual Funds have risen in prominence over the last few years, and this has inevitably led to newer types of funds both on the equity and debt scene. One of these is equity income funds, a hybrid product that offers an exposure to arbitrage opportunities within equity.
It was conceived after the change in tax norms post the budget in 2014. And today, it is now an attractive option for investors seeking to conservatively grow money in the medium term.
Underlying Structure
Typically, equity income funds in the market comprise of a portfolio that is more or less split into three components – each investing in debt securities, equity arbitrage opportunities and long-only equity. In this context, arbitrage opportunities refer to the differentials in price between cash equity and equity derivatives. This offers low volatility, steady returns similar to short-term debt instruments.
Risk Parameters
Since the majority of a portfolio in such funds offers low volatility with relatively predictable returns, it can be a suitable product for risk-averse investors who do not want too much exposure to equity. One can look to conservatively invest in such funds with an outlook of 3 to 5 years.
Tax Treatment
Since an arbitrage position is technically equity, equity income funds are treated under the equity umbrella both from a short and long-term standpoint. While lumpsum investments in equity products are usually not recommended, you can make a case for such an investment in these funds from time to time.
In all, equity income funds occupy a spot between Debt Funds (say, a MIP) and a balanced fund. So far, all schemes in this category are actively managed. And you are well advised to compare them against various benchmarks and pick one most suitable for your portfolio.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for Credit Card, Personal Loan, Home Loan, Car Loan, and insurance.