Equity Income Funds

Equity income funds were launched in India in 2014, and combine the stability of fixed income with the tax benefits of equities. Equity income funds consist of securities from mature and reliable companies that give steady dividends, unlike value funds that invest in undervalued stocks. It is essentially a hybrid fund, comprising debt, pure equity and equity arbitrage options. This diversity within the fund lends security to the investment even if equity market is not doing quite well.

Some of the examples of equity income funds in India are: Templeton India Equity Income Fund, ICICI Prudential Equity Income Fund,

Features Of Equity Income Funds

The following features of equity income funds make it a desirable mutual fund to have in your investment line-up:

  • Diversification is one of the prime reasons for investing in an equity income fund. It allows you to add diversity to your portfolio in a low-risk low-expense mode.
  • The presence of bonds, securities and fixed deposits in the debt component ensures that your investment is stable even in a fluctuating market.
  • Equity income funds allow fund managers to take advantage of arbitrage – simultaneous trading of securities in different markets to make the most of differing prices for the same asset – in the cash market and derivatives market. This means that at the end of the day you make higher returns than if you traded only in one kind of market, while maintaining a lower risk level.
  • Because of the arbitrage component, equity income funds are actively managed funds and hence have higher performance and efficiency as opposed to passively managed index funds.
  • These funds have more than 65% equity exposure, due to which it falls under the equity fund tax bracket. This means that you need to pay only 15% tax on short-term capital gains and absolutely no tax on long-term gains.

Risks Of Equity Income Funds

Mutual funds have inherent risks attached to them. The disadvantages in the case of equity income funds are as given below:

  • Equity income funds, despite giving higher yields than money market funds and debt funds in the longer term, are considered conservative investment options because of the relatively low risk factor.
  • Because this is a relatively new product, the amount of comparative data available is less and hence it may be difficult for an investor to judge its efficacy.
  • It is also difficult to adequately track the performance of an equity income fund against a benchmark index. The fund comprises pure equity, arbitrage and debt, all of which subscribe to different benchmarks.
  • These funds may not give your immediate returns because of the low-risk investment style. You may have to wait 2-3 years or more to see higher yields.

The focus of equity income funds is to ensure prevention of losses and decrease the volatility in an investment portfolio. It is a good investment for beginners and safe players who do not want to take the high risks associated with pure equities. It is also great for those looking to slow long-term wealth creation. 

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