Magnum TaxGain: Switch

Recommendation: Switch

Aarati Krishnan

MAGNUM TaxGain, the tax-saving fund from SBI Mutual Fund, has slipped up after being one of the top performers in 1999. Through 2000, the fund's NAV lost around 44 per cent in value, underperforming both narrow and broad market indices in the process. Over 2000, the fund has also underperformed the majority of tax-saving schemes from other mutual funds. A late entry into stiffly valued telecom and media stocks and a smattering of small and midcap stocks in the portfolio have been behind the fund's poor performance.

The portfolio strategy over the past year suggests that it is unsuitable for the risk-averse. Such investors may switch their investments to a more conservative tax-saving option, if their lock-in period on investment has expired.

Click here for Table

A review of the portfolio since November 1999 (the date the fund went open-ended) reveals the following factors:

*After starting out with a moderate exposure to software/media stocks in December 1999, the fund steadily added to its technology exposures in the first quarter of 2000. The stiff valuation for technology stocks at this point is likely to have contributed to a high initial cost for these acquisitions.

*The fund's portfolio has been quite frequently churned especially in the first and the final quarters of 2000.

*A limited allocation to cash/equivalents has worked against the fund in a falling market. The fund had a less than eight per cent cash exposure in March 2000, just prior to the meltdown in equities. Thereafter, the cash position has seldom exceeded this limit.

*Unlike funds such as Alliance Tax Relief or Kothari Taxshield, which encashed a part of their high returns in 1999 to pay out dividends to their unitholders in the first quarter of 2000, Magnum TaxGain did not make any dividend payout during 2000, instead reinvesting in equities. This has depressed investment performance in relation to peers, in the bear market.

*In the period between December 1, 1999 and March 1, 2000, the fund's exposure to software stocks climbed from 25 per cent to 37 per cent, and media stocks from 12 per cent to 17 per cent. The fund also acquired new exposures in telecom, for which sectoral exposures went up from nil to 17 per cent. Stocks such as Himachal Futuristic, Shyam Telecom, Global Telesystems were acquired during this period. The late entry into such stocks is likely to have made the fund particularly vulnerable to the subsequent meltdown in these stocks.

*High allocations to some of the second rung software stocks is also likely to have contributed to the fund's underperformance in the market. The fund had around 23 per cent of net assets invested in SSI by end of February 2000, with stocks such as Aftek Business, Shyam Telecom, Sri Adhikari Brothers, also accounting for a substantial chunk of the top holdings.

*The substantial speculative element associated with these stocks has probably contributed to high NAV volatility for this fund over the past year. The fund's NAV has declined from Rs 51.79 per unit in end February 2000 to present levels of Rs 24 per unit.

*Since the fund held the view that the good earnings numbers from the technology stocks in its portfolio would pay off eventually, the fund continued to maintain an overweight position to the above technology stocks well into April/May 2000.

*It is only in the last quarter of 2000 that the fund has toned down its exposures to the technology/media/telecom triad, liquidating holdings such as Himacahal Futuristic and Zee Telefilms. While HFCL remained in the top two holdings until October 2000, Zee Telefilms remained the third largest holding until November 2000.

ABetween September 1, 2000 and end December 2000, the fund's exposure to software stocks remained largely unchanged at 27 per cent of net assets. Allocations to media and telecom stocks have declined from 24 per cent and 11 per cent to 12 per cent and 10 per cent, respectively. On the other hand, the fund has acquired fresh exposures in sectors such as cement (2.5 per cent by December), pharma (7.7 per cent), courier (4.3 per cent), and diversified companies (18 per cent).

During the last quarter of 2000, the fund appears to have made a conscious effort to weed out second rung technology stocks, instead of replacing them with stocks outside of the IT sector. While stocks such as SSI, HFCL and Zee Telefilms have been pruned, Reliance Industries, Cipla, Larsen & Toubro, TNPL and Shantha Biotechnics have been made part of the top holdings. The present portfolio appears to carry a lower risk profile with a better balance of the technology and non-technology holdings.