Equity savings funds are hybrid mutual funds that combine equity, debt and arbitrage in one portfolio. The equity portion gives the fund a chance to participate in growth. The debt portion adds balance to the portfolio. The arbitrage portion tries to earn from price differences between the cash and futures market.

Under SEBI rules, an equity savings fund must invest at least 65% of its total assets in equity shares. IT also requires a net long equity exposure of 15% to 40% and at least 10% in debt instruments. This allocation structure makes these funds different from a regular equity fund. A large cap fund or flexi cap fund, for example, takes complete exposure to shares. An equity savings fund uses hedging, arbitrage and debt to manage the equity exposure.

This hybrid scheme can be worth considering if:

• You want a balance instead of a pure equity bet: The portfolio combines equity, arbitrage and debt. This can make it different from holding only equity-oriented funds such as mid-cap funds or small-cap funds.
• You want to add equity exposure to your debt portfolio: If you already have investments in debt funds and want to introduce some equity exposure, this scheme can provide a middle ground without making the entire portfolio equity-heavy.
• You prefer a fund with built-in hedging: Part of the equity exposure can be hedged through derivatives. This reduces the fund’s net long equity exposure compared with a traditional equity fund.
• You can accept moderate market fluctuations: These funds can still lose value when equity markets fall. They may be less aggressive than many pure equity funds, but they are not designed to behave like a savings account or fixed deposit.

When you invest in an equity savings scheme, your money is divided across different strategies. One part is invested in equity shares. Another part can be used for arbitrage. The remaining allocation can include debt securities.

So, if you invest ₹10,000 in this fund, it may invest some amount in shares of Indian companies, while also using futures contracts to hedge part of the equity exposure. Some money will also be used to buy government securities or corporate bonds.

Now imagine the fund’s NAV is ₹25 when you invest. You receive 400 units. If the combination of equity gains, arbitrage gains and debt income pushes the NAV to ₹30, your investment becomes ₹12,000.

However, if equity markets fall and the fund’s overall NAV drops to ₹22.50, your investment would be worth ₹9,000.

The important point is that all 3 components of this fund don’t necessarily move in the same direction. That is what gives this category its hybrid structure.

• Three return sources in one portfolio: Returns can come from equity appreciation, arbitrage opportunities and income from debt and money market instruments.
• Built-in portfolio diversification: You don’t have to create separate equity, arbitrage and debt investments yourself. The scheme manages these allocations within one fund.
• Lower net equity exposure than a typical equity fund: SEBI’s framework limits net long equity exposure to 15% to 40% of total assets. This is better than simply putting most of your money into unhedged shares.
• Gets tax treatment of equity funds: Because of their majority equity exposure, these hybrid funds are taxed as equity-oriented funds. As a result, your short-term capital gains are taxed at 20% and long-term capital gains above ₹1.25 lakh are taxed at 12.5%.

Before you start picking equity savings funds to invest in, you should know about these risks:

• Equity markets can still hurt returns: Hedging reduces net equity exposure, but it doesn’t remove equity-related risks. A sharp market fall can still affect the portfolio.
• Arbitrage opportunities are not unlimited: The returns from arbitrage depend on the price differences available in the market. When spreads are small, this part of the strategy may contribute less.
• Debt investments carry their own risks: The debt portion can be affected by interest rate movements, credit events and liquidity conditions. The actual risk depends on what the scheme owns.
• The portfolio can become more defensive: Fund managers can change the mix when market conditions or arbitrage opportunities change. That means the portfolio may not behave the same way throughout your investment period.

Both are hybrid funds that use arbitrage strategies, but they serve different purposes. Equity savings funds combine equity, arbitrage and debt, while arbitrage funds heavily focus on arbitrage positions.

Here’s a quick comparison of the two:

If you want a different risk-return mix, you can also consider conservative funds, balanced funds, multi asset allocation funds or regular equity funds.

When searching for the best equity savings mutual funds, don’t compare returns alone. Instead, look for other factors, such as:

• Net equity exposure: This will tell you how much direct equity exposure the fund is taking after considering its hedged positions. It should be in the permissible range of 15% to 40%.
• Arbitrage allocation: See how much of the portfolio is being used for arbitrage. Also check whether the fund has historically relied heavily on this strategy.
• Equity portfolio: Check whether the fund mostly holds large companies or takes more exposure to mid and small caps. This can change the overall risk.
• Debt portfolio: Look at the credit quality, duration and issuers in the debt portion.
• Rolling returns: Rolling returns help you see how the fund performed across multiple periods instead of relying on one fixed starting date. This can be more useful when judging consistency.
• Expense ratio: Costs matter because they are deducted from the scheme’s assets. Compare similar funds on both expenses and performance.
• Riskometer: Use the riskometer along with the portfolio. It gives you a quick view of the scheme’s overall risk level.

The top name on the list of best equity savings funds may not be the right choice for you. The right ones should match your risk tolerance level and your financial goals.

Once you make up your mind to invest in equity savings funds, it only takes a few minutes to set up a SIP on Millions:

• Download the Millions app from the iOS App Store or Google Play Store.
• Enter your mobile number, verify your details and complete the KYC process.
• Once done, head over to the mutual funds section and find the equity savings scheme that matches your needs.
• Click on ‘SIP’ and choose how often you want to invest (daily, monthly or weekly).
• Enter the SIP amount, select your debit date and authorise the payment.

Your SIP is set! You can start with an amount that feels comfortable for you. An equity savings fund gives you a mix of equity, arbitrage and debt in one place. If you are not sure whether this mix is right for you, you can explore other schemes such as balanced funds, conservative funds, or pure equity funds or debt funds before making a decision.