Monday, November 10, 2008



Defense pays but……divergence prevails

The broad market fall from January 2008 has taken its toll on the tax planning ELSS funds as well. The downside protection strategy has a common thread across several funds. Many of the funds have significantly increased exposure to large-cap stocks as a result of the volatility associated with mid-cap stocks. The increase in asset size has also necessitated a move to large cap stocks over the past year. Concentration of stocks and sectors has also quite reduced. Some funds have moved heavily into cash/debt investments. The year-to-date returns of these funds have significantly lagged the Sensex, Nifty and BSE-100 returns. Barring Sundaram Tax Saver and Taurus Libra Tax Shield (a bolt from the blue since it has been a laggard in the past), none of the funds yielded positive returns on a one-year basis. The gulf between the top and bottom five funds’ returns is quite wide, indicating that stocks and sectors chosen may have made a big difference.

Magnum Taxgain Gem

Street Smart

Magnum Taxgain has emerged as the prodigious son of the ELSS category. The top performing fund in the 3- and 5-year time frame, SBI Magnum Taxgain retains the flexibility to move into whichever market segment it sees opportunities in. Since January 2007, the fund has been consciously reducing its exposure to technology, while increasing exposure to auto and financial services. The allocation to the tech sector is down to 8.98% from 16.6% last year. The share of financial services has gone up by five times from 3% last year to 15% this year. The past performance of the fund and its ability to move into various segments of the market makes it an attractive proposition for investors willing to put up with a degree of uncertainty for higher returns.

HDFC Taxsaver Gem

Vital Veteran

An exemplary track record and a highly reliable fund house make HDFC Taxsaver one of the best in its category. Since November 2004, it has steadfastly held on to its five-star rating. Known for its astute stock picking and stellar performance, it has also shown resilience while protecting the downside time and again. But despite being a compelling tax-saving option, it has stumbled a bit lately when there was a change in fund manager. Once at the helm, the new fund manager made a couple of visible changes to the portfolio. Exposure to auto and construction stocks was significantly lowered while notable positions were built in sectors like energy, banking and services. The increased investment in Reliance Industries and banking stocks proved rewarding but the higher allocation to technology has dented performance. Though held in high regard, as far as the category of tax-planning funds is concerned, the fund is not completely out of the woods. But going by its great performance history and the reliability of the fund house, this fund remains a vital ingredient of a core portfolio despite its recent setback.

Birla Equity Plan Gem

Meticulous Model

Birla Equity Plan has come a long way since inception to emerge as a category beating fund. Except for 2007, the fund has consistently beaten the category returns over the past five years. The fund manager churns the portfolio quite aggressively. He moves swiftly in and out of sectors spotting opportunities and strategically timing his entry and exit. With a fund size of Rs 196 crore, the fund is still small enough to be nimble while moving in and out of sectors and stocks. From a concentrated portfolio of 32-35 stocks, the fund has gone to a more diversified portfolio of 45-50 stocks in the last six months. While this reduces the risk in the fund, it also limits the gains from good stock picks. The refreshing difference in the portfolio is the lower than average allocation to the technology sector. This has stood the fund in good stead in the recent market meltdown.

Fidelity Tax Advantage Gem

Youthful Yarn

In its short life, Fidelity Tax Advantage has managed to consistently shine over its category. This fund prefers to play it safe and has maintained an average large-cap allocation of 62 per cent. This move has paid off well for the fund as in the ongoing market turmoil. The portfolio is diverse with stocks ranging between 66 to 91 and rarely any stock accounts for four per cent of the fund’s portfolio. Nearly three fourth of the fund’s portfolio has been held for over one year. The fund manager has picked small positions ahead of many others in a series of small companies which have been very rewarding. The fund manager seems to be bullish on the financial services sector and has been consistently increasing the stake in this sector. Technology and Energy are the other dominant sectors in the fund’s portfolio.The fund has evolved to be a steady well-diversified offering that has consistently beaten the category average.

Sundaram BNP Paribas Tax Saver In

Sensible Star

A defensive strategy of maintaining nearly 30% as cash compared to 10% a year earlier has enabled it to hold its head above water (earn a positive return) as opposed to its peers who have had to remain under water (earn negative returns). The fund has always maintained a well-diversified portfolio with 55-60 stocks. So, even if one, or few stocks underperform, the overall performance will not be at risk. The fund has reduced its large-cap exposure in the last quarter of 2007 unlike most funds that increased holdings in large-cap stocks during the period. As a fund that can shift across segments, the ability of the fund manager to identify trends early enough has been crucial in the fund's performance and is suitable for investors willing to take this risk. Its AUM has been surging at a breakneck speed. It started out as a fund having assets of Rs 3.8 crore in January 2001. At the end of January 2008, the AUM surged to Rs 402 crore, an increase of 100 times in seven years!

Principal Personal Tax Saver In

Super Saver

The Principal Personal Tax Saver is a diversified ELSS which has been around for more than a decade now. The fund offers a high amount of stock and sector level diversification with top five sectors constituting 42% of the corpus and a consistent 35-45 scrips in its kitty which currently stands at 44. The fund made early inroads into infrastructure and related sectors when the sector started booming and consistently maintained a high exposure especially to capital goods which witnessed a spectacular run and has still continued to show great potential. The fund has taken a contrarian stand with high exposures to IT and textiles which have been reeling due to Rupee appreciation and has only recently pruned its exposure to Auto although this does not seem to have dented the fund’s fantastic performance. The stock selection has consistently been excellent. The fund has traditionally been an aggressive offering with the fund manager often resorting to high portfolio churn and high levels of exposure to small caps and mid caps. But more recently it has witnessed a significant change in style with a much needed increase in exposure to large caps and adoption of a more conservative strategy with the entry of the new fund manager. The new fund manager has retained a majority of the small and mid cap stocks that have contributed handsomely to the fund’s performance, thus creating an excellent balance between safety and aggression.

Taxing Times

The trauma of the financial sector has (t)painted the present scenario as taxing times. Nevertheless, the towering tax tycoons of last year have maintained their position refusing to be torn by the typhoon or rather tsunami that devastated the hitherto invincible (so we thought!) financial behemoths. A red carpet has indeed been spread to accord a royal welcome to two of the most resilient ELSS funds that have embellished the entourage!

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