Prudential ICICI Tax Plan: Hold

Recommendation: Hold

Aarati Krishnan

OVER 2000, the Prudential ICICI Tax Plan underperformed funds such as Kothari Pioneer Taxshield, Alliance Capital Tax Relief, Sundaram Taxsaver in the same category.

The fund's net asset value (NAV) lost around 41 per cent in value over the year, suffering a sharper value erosion than the BSE Sensitive Index, which lost 21 per cent.

Since the fund was launched in mid-1999, the three-year lock-in period for investors in the scheme has not yet expired. Therefore, investors can hold their investments in the scheme until the expiry of the lock-in period. At the end of this period, investors can review the performance and switch to alternative schemes if necessary. Fresh exposures in the fund can be avoided at this juncture, in light of the scheme's underperformance of some of its peers.

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A study of the changes in the fund's portfolio over the past year reveal the following features:

*Unlike the funds from Kothari Pioneer or Alliance, which concentrate on just a few stocks, Prudential ICICI Tax Plan appears to emphasise stock-specific diversification, limiting each of its exposures to less than 9 per cent of the total net assets size.

*The fund has also practised sectoral diversification; but with an emphasis on growth stocks. The fund had 51 per cent of net assets invested in technology stocks in March 2000, followed by 12.5 per cent in healthcare, with the balance in consumer goods. Exposures to capital goods, metals and so on were marginal.

*Both these factors should normally have led to a lower risk profile for the fund, restricting the downside to the NAV in a falling market. But this does not appear to have happened in reality. This is probably because, rather than focus on large-cap stocks, the portfolio has had significant weightage in a range of small and mid-cap stocks.

*The fund's top exposures featured stocks such as Peerless Shipping, TVS Electronics, McDowell and United Breweries, apart from Infosys, Zee Tele, Himachal Futuristic and L&T. The small and mid-cap stocks in the fund's portfolio (such as McDowell, UB and TVS Electronics) suffered big swings in valuation levels over the past year. This strategy is likely to have contributed to a higher volatility in the fund's NAV.

*Technology stocks have suffered heavier value losses than the market over the past one year, with the BL Technology Index losing a shade less than 50 per cent in value over the year. Small and mid-cap stocks within the technology sector have lost more value than the frontline stocks. For Prudential ICICI Tax Plan the impact of this fall would have been magnified because its portfolio has consistently assigned significant weightages to small and mid-cap companies in the technology sector. Zee Telefilms, Leading Edge Systems, Mastek and SSI were some stocks that featured in the fund's portfolio, and each of these suffered heavy setbacks.

*The presence of stocks such as Himachal Futuristic, Global Tele, Zee Telefilms and UB in the top holdings, each of which boast of a fairly high speculative element, probably added to the fund's risk profile.

*The fund's portfolio appears to have been quite frequently churned in the first half of the year, as evidenced by the significant changes in top holdings from month to month.

*However, of late the fund's top holdings have been more stable. It also appears to have trimmed exposures to some of its small and mid-cap holdings, such as Peerless Shipping, DSQ Software, TVS Electronics and Lupin Labs to step up exposure to top-rung stocks.

*The fund's weightage in the technology sector has been brought down from around 51 per cent in March 2000 to around 40 per cent in December 2000. Weightages have been enhanced in sectors such as cement (7.2 per cent of net assets by December 2000), chemicals (4.5 per cent), capital goods (3.8 per cent) and finance (2.9 per cent).

*The fund's present portfolio represents a better balance of cyclicals and technology stocks than was the case in the first quarter of 2000. This apart, the individual holdings also appear to be of better quality than earlier.