Find Your Financial Comfort !!!

Making money is hard work. Keeping it safe while trying to grow it can feel even harder. Most of us struggle to find that perfect middle ground between the safety of a bank deposit and the rollercoaster ride of the stock market.

Based on insights from a reputed fund manager Bhavesh Jain and financial adviser Kirttan Shah, there is a spectrum of investment options designed to solve specific life problems. Instead of looking at technical definitions, let us look at five relatable situations. You might just find yourself in one of them.

1. The Case of "Safety First" Suresh

Suresh recently sold an ancestral property and has a lump sum sitting in his savings account. He needs this money in six months to pay the down payment for a new flat. Every time he hears about the stock market crashing, he touches his chest and drinks a glass of water. He wants his money to be absolutely safe, but he feels bad seeing it earn a pitiful 3% in the savings account.

The Potential Fit: Arbitrage Funds

For someone like Suresh, who cannot afford to lose even a rupee, an Arbitrage Fund is often a suitable parking spot. These funds work by buying a stock in the cash market and selling it in the futures market simultaneously. The profit is locked in instantly, meaning there is zero naked exposure to market movements. It is extremely low risk and tax efficient.

The Tax Advantage over Savings/FDs: If Suresh leaves that money in a Savings Account or puts it in a short-term FD, the interest earned is taxed at his marginal slab rate. If he is a high earner, 30% of that interest is gone. Arbitrage funds, despite having the risk profile of a liquid fund, are taxed as equity. Even for a 6-month holding period (Short Term), he pays a flat 15% tax on gains. That is significantly better than paying 30% tax on FD interest.

Funds to Consider:

• Kotak Equity Arbitrage Fund: This fund has a massive asset base and manages liquidity very well, which is crucial for short term parking.
• SBI Arbitrage Opportunities Fund: A consistent performer that focuses on safety and low volatility, making it a good choice for conservative needs.

2. The Dilemma of "Tax Hater" Tanu

Tanu loves Fixed Deposits. She loves the certainty. But every year around tax season, she gets grumpy. She falls in the 30% tax bracket, which means a large chunk of her FD interest goes straight to the government. She wants a product that behaves like an FD but does not tax her like one. She is willing to take a tiny pinch of risk if it means saving on taxes.

The Potential Fit: Equity Savings Funds

Tanu might find her answer in Equity Savings Funds. These funds invest about 25% in stocks, 40% in arbitrage, and the rest in debt. Because of the equity and arbitrage mix, they are treated as equity funds for taxation. This means significantly lower tax on gains compared to traditional FDs, while the risk remains quite low.

The Tax Advantage over Fixed Deposits: This is exactly what Tanu needs. Because these funds maintain a gross equity exposure of over 65% (combining pure stocks and arbitrage), the taxman treats them as equity funds. If Tanu holds an FD for 3 years, she pays 30% tax on all interest every year. If she holds this fund for 3 years, her gains are Long Term Capital Gains (LTCG), taxed at only 12.5% (after the first ₹1 Lakh exemption). The difference between paying 30% tax and 12.5% tax makes a huge difference to her final corpus.

Funds to Consider:

• Mirae Asset Equity Savings Fund: Known for keeping costs low with a competitive expense ratio, which helps in better net returns.
• Kotak Equity Savings Fund: This fund has a long history of managing the delicate mix of debt and equity efficiently.

3. The Wish of "Retired" Roy Uncle

Roy Uncle has retired and lives off the interest from his corpus. He is worried because interest rates are falling, and his monthly expenses are rising. He looks at the stock market with envy but knows he cannot risk his capital at this age. He wishes there was a "Pension Plus" product that could give him 2% or 3% more than his bank bonds without making him lose sleep.

The Potential Fit: Specialized Investment Funds (SIF) or Hybrid Long Short

This is a newer category that acts as a fixed income replacement. These funds invest mostly in safe debt but use complex strategies like selling call options (covered calls) to generate extra income. They aim to deliver returns that are better than debt funds while keeping volatility very low.

The Tax Advantage over Pure Debt Funds: Uncle Roy used to rely on Debt Mutual Funds, but new rules mean any debt fund bought after April 2023 is taxed at his slab rate, just like an FD. However, many SIFs (like the examples below) are engineered to maintain 65%+ equity derivative exposure to qualify for equity taxation. This means Uncle Roy can potentially earn higher returns than debt funds and only pay 12.5% LTCG tax on withdrawals  after one year, rather than his income tax slab rate.

Funds to Consider:

• Altiva Hybrid Long Short Fund: This fund specifically targets returns of "Arbitrage plus 3%" by using covered call strategies on a high quality debt portfolio.
• Quant Hybrid Long Short Fund: This fund uses active management and data driven strategies to protect capital while seeking moderate gains.

4. The Anxiety of "Burned" Binoy

Binoy started investing in stocks in January 2020. By March 2020, his portfolio was down 40%. He panicked and sold everything at a loss. Now, he wants to enter the market again, but he has "crash phobia." He wants a fund manager who will automatically reduce risk when the market gets expensive and increase it when the market is cheap, so he does not have to make those stressful decisions.

The Potential Fit: Balanced Advantage Funds (BAF)

For nervous investors like Binoy, a Balanced Advantage Fund is often the right vehicle. These funds dynamically change their equity exposure. If the market valuation is high or the trend is negative, they reduce equity. If the market crashes, they increase equity. It smooths out the ride and offers a good experience for conservative equity investors.

The Tax Advantage over Manual Balancing: If Binoy tried to do this himself—buying stocks when low and selling when high—every time he sold a stock within a year to reduce risk, he would pay 15% Short Term Capital Gains tax. In a BAF, the fund manager does all this buying and selling inside the fund. Binoy pays zero tax on these internal transactions. He only pays tax when he finally redeems his units.

Funds to Consider:

• ICICI Prudential Balanced Advantage Fund: Uses a valuation model to buy low and sell high, a strategy that has worked well over many market cycles.
• Edelweiss Balanced Advantage Fund: Uses a trend based approach that offers strong downside protection during sharp market falls.

5. The Vision of "Long Term" Lavanya

Lavanya is 30 years old and is saving for her dream retirement villa. She has 15 years to go. She knows she needs equity to beat inflation, but she doesn't want the extreme volatility of a pure mid cap or small cap fund. She wants a core portfolio that grows steadily and has a small cushion of debt to handle minor bumps along the way.

The Potential Fit: Aggressive Hybrid Funds

Lavanya is a prime candidate for Aggressive Hybrid Funds. These funds typically invest 75% in equity and 25% in debt. The debt portion acts as a shock absorber, while the equity portion powers long term growth. It is a classic structure for wealth creation with slightly lower volatility than pure equity funds.

The Tax Advantage over Separate Portfolios: Lavanya could buy an equity fund and a separate debt fund. But the gains on the separate debt fund would be taxed at her high income slab rate. In an Aggressive Hybrid Fund, the entire pot—including the 25% debt portion—gets the benefit of equity taxation. When she withdraws after 15 years, her entire gain is taxed at just LTCG. It’s a highly tax-efficient way to hold a debt cushion.

Funds to Consider:

• SBI Equity Hybrid Fund: A heavyweight in the category known for steady dividends and long term consistency.
• ICICI Prudential Equity & Debt Fund: A well managed fund that takes active calls on its debt portion to generate additional returns.

 The Secret Sauce: Here is the key ingredient that makes these investments special: In India, almost all the above are structured to be treated as "Equity Oriented Funds" for tax purposes.

Why does this matter?

• Traditional Debt Options (FDs, Savings, New Debt Funds): The interest or gains are added to your income and taxed at your income tax slab rate. If you are in the 30% bracket, you lose almost a third of your returns to tax.
• Equity Oriented Funds:
• Short Term (<1 year): Taxed at a flat 15%.
• Long Term (>1 year): Taxed at only 12.5% on gains exceeding ₹1 Lakh in a financial year.

This tax difference can massively boost your real, in-hand returns. Earning money is only the first step. The real challenge is ensuring that your hard earned money does not sit idle, losing value to inflation every year. You do not always need to take high risks to grow your wealth. As these stories show, there is likely a financial product tailored to your specific fear level and time horizon.

By mixing and matching these categories based on your personal risk profile, you can create a portfolio that works as hard as you do.

 

 

Disclaimer: The information provided above is for educational purposes only and does not constitute financial advice. The specific funds mentioned are used as examples to illustrate the category and are not buy or sell recommendations. Please consult a SEBI registered investment advisor before making any investment decisions.