Sundaram Tax Saver: Invest

Recommendation: Invest

Aarati Krishnan

A SUBSTANTIAL cash position and a moderate allocation to technology stocks has helped Sundaram Tax Saver weather the bear market in equities well.

The open-end scheme, which has completed a year since inception, is among the better-performing tax-saving schemes. But the fund's penchant for diversification could make for a steady, rather than spectacular, performance in a bull market.

Over the past year, the fund has posted a substantially lower decline than the BSE 200 index. The scheme's small size (Rs 3.37 crore as at end-November), is an advantage when it comes to quick portfolio churning. The upfront tax rebate of 20 per cent on investments in this fund, make it an attractive option.

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Portfolio overview: An analysis of the fund's portfolio over the past year reveals the following features:

*The fund trades actively on its portfolio. While the equity holdings of the fund have not changed much over the months, the weightages in individual stocks varied considerably. The fund appears to churn its portfolio frequently to enhance or reduce exposures to each of its holdings based on the price action in each stock.

*Special emphasis is placed on restricting individual holdings to 5 per cent or less of the net assets. Portfolio changes from month to month appear to be triggered partly by profit-booking, designed to keep individual holdings within this ceiling.

*As a result, the fund has a large number of stocks in its portfolio for its size, viewed in relation to competitors. The number of stocks in the Tax Saver portfolio by end-November was around 39, which is large given the fund size of Rs 3.37 crore. Given the relatively small exposures in each stock, the portfolio can probably be liquidated at short notice. This could enable active churning of the portfolio; but could make for a high proportion of transaction costs as well.

*The fund avoids a concentration strategy; that is, the fund avoids taking large bets on individual stocks and sectors. The top ten holdings typically account for 30-40 per cent of net assets, compared to over 60 per cent for some of the more concentrated funds. This strategy has both its pros and cons. Measured exposures have helped contain the vulnerability of the portfolio to a meltdown in individual stocks and sectors.

On the other hand, because it refrains from taking large bets on individual stocks, the fund's NAV may not rise sharply even if the fund's top holdings pay off. In a concentrated fund with just a few holdings, good stock selection in the top ten holdings can make a material difference to the short-term NAV performance. In a diversified fund such as this, individual holdings may not exercise too much influence on the NAV. A majority of stocks in the fund's portfolio will have to do well, for the fund to turn in good returns.

*The fund's sectoral exposures are also widely spread. Technology stocks have received the largest allocation since inception and the tech stock allocation has ranged between 18 per cent (January)and 29 per cent (August). Other exposures are more or less evenly spread across consumer goods, healthcare, telecom, auto, finance, and so on.

*The fund has maintained a substantial cash position since inception. By end-January, just ahead of the tailspin in equities, the fund held 44 per cent of net assets in cash. This could have been partly because this was just a couple of months after launch. This helped the fund survive the subsequent bear market quite well. Allocation to cash/equivalents fell to around 9 per cent in August, but increased in recent months. The allocation to cash rose to 17 per cent at end-October and further to 22 per cent by end-November.

*The fund's portfolio features quite a few small and mid-cap stocks. Stocks such as Colour Chips, Apollo Hospitals and Aksh Optifibre have featured on and off in the portfolio. Though liquidity could be an issue with stocks such as Colour Chips in a bear market, the fund's small size and its lower exposures in each stock mitigate this problem.

The lack of concentration in the portfolio and the moderate technology stock allocation has stood the fund in good stead in a falling market. However, due to its policy of refraining from large bets on individual stocks, the fund is unlikely to match the performance of more concentrated competitors whose stock selections pay off in a really big way.