Alliance Capital Tax Relief: Invest

Recommendation: Invest

S. Vaidya Nathan

FRESH investments can be contemplated in Alliance Capital Tax Relief, the open-end tax savings scheme of Alliance Capital Mutual Fund, as its track record has been fairly good.

It has a heavy tilt towards the technology sector, but this could pay off over a three-year period.

The fund's ability to get into stocks that could provide big gains has been notable though some such exposures _ including Global Tele-Systems, Himachal Futuristic and Shyam Telecom _ have enhanced the risk levels. But the fund has had the returns to compensate adequately for these risk levels at least so far.

By paying a hefty Rs 30 dividend (300 per cent in the first half of 2000 and with quick reshuffling of portfolio, the fund has managed to weather the storm in the technology stocks. It has emerged as the major tech-weighted portfolio to have come out of the meltdown in a fairly strong manner. Over a four-year period, the fund has been among the top performers in the equity schemes category (see Page 7).

Top holdings: The top ten holdings of the fund are in the stocks of companies such as Himachal Futuristic, Infosys Technologies, HCL Technologies, NIIT, Sterlite Optical, HDFC Bank, Shyam Telecom, Satyam Computer Services and Glaxo India as of October 2000. The top ten holdings accounted for around 73.8 per cent of net assets. The fund has an asset base of Rs 18.3 crore and a corpus of Rs 2.84 crore.

Portfolio review: A scrutiny of the portfolio over the period since 1996 highlights the following aspects:

*The fund has consistently remained fully invested with close to 90 per cent of assets placed in equities.

*The fund has also consistently kept the weightage of the top ten holdings at fairly high levels of around 75 per cent.

*The fund was among the first to get into technology stocks in a fairly big way. By entering into stocks such as Infosys and Satyam (and Zee too which it has now got out of), it captured a vast part of the gains in these stocks in the 1997-2000 period.

*Alliance Capital Tax Relief started off with a fairly diversified portfolio. Subsequently it quickly moved into triad of FMCG, pharmaceuticals and technology sector.

*It also moved out of FMCG and pharmaceuticals sectors before the downward rating of the stocks took place.

*By early 2000, the portfolio had an excessive telecom/technology sectors. At one point of time, it had large exposures in Global Tele-Systems, Himachal Futuristic and Shyam Telecom. But it has pared down exposures in Global Tele-Systems completely and Shyam Telecom to some extent.

*Sterlite Optical and HDFC Bank have also proved to be some of the non-tech stocks that have delivered the goods.

*The overall quality of the portfolio appears to be fairly good with a presence in top-line stocks and some risky exposures such as Sterlite Optical and Shyam Telecom.

Top sectoral exposures: Close to 40 per cent of assets are in the technology sector, 16 per cent in telecom, 8 per cent in finance, 6.6 per cent in healthcare and 4.7 per cent in beverages/tobacco. The cash and cash equivalents accounted for around 6 per cent of assets.

Suitability: Alliance Capital Tax Relief '96 is appropriate for investors with an appetite for a higher degree of risk than one would expect from equity investments, on an average. Investors without much exposure to the technology sector can consider exposures after using an option such as the Kothari Pioneer Infotech Fund (which has a higher degree of stability and top-line exposures in the technology sector).

Investors comfortable with higher than market risk can opt for an investment in this mutual fund. Investors can opt for the dividend option of the scheme. Even if dividends distributed by mutual funds are made taxable in next year's Budget, investors can stick to the dividend option. Since the investment is locked-in for three years, dividends declared help in cashing out a portion of the gains. Investments in the fund are eligible for a rebate of 20 per cent under Section 88 of the Income-Tax Act.

Fund facts: Alliance Capital Tax Relief '96 was launched in December 1995 as a close-end tax savings scheme, and was made open-ended last year. The fund offers a growth option. The NAV of the Alliance Capital Tax Relief 1996 is Rs 65.94 per unit.The fund offers entry at a load of one per cent to the NAV. A redemption at NAV-linked prices is available after the three-year lock-in period.