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Aarati Krishnan

AFTER notching up an impressive performance until 2003, the performance of Alliance Capital Tax Relief has slipped sharply in the recent times. Not only does the fund's one-year return trail its peers by a significant margin, it also lags the market.

Investors who have completed their lock-in period in the fund may liquidate their exposures and consider switching to a diversified tax-saving fund with a superior performance. Fresh exposures may be avoided by those who continue to be subject to the lock-in period.

Consequent to the takeover of the Alliance funds by Birla Sun Life, there is likely to be a change in the fund's management. Investments can be evaluated after the fund establishes a record under the Birla fold.

Suitability: The recommendation to liquidate is particularly relevant to investors who have Alliance Capital Tax Relief as one of the core equity funds in their portfolio.

In terms of its investment strategy and risk profile, the fund has been quite aggressive. It takes fairly focused exposures in its top holdings and holds relatively few stocks.

Performance: From its inception until 2003, Alliance Capital Tax Relief sustained an exceptional performance record, with its compound annual returns amounting to 47 per cent. Every Rs 10 invested in the fund in 1996 would have grown to Rs 146 by end of 2003!

However, over the past year, the returns have experienced wide swings from quarter to quarter, with the fund not handling the corrective phases as well as some of its peers. As a result, the one-year returns from the Alliance Capital Tax Relief now stand at about 7.4 per cent, compared to returns of between 17 and 25 per cent on funds such as Franklin India Bluechip, Templeton India Growth and HDFC Equity, which have a consistent five-year record.

Competitors within the universe of tax saving funds such as HDFC Taxsaver have fared even better. Therefore there has been a significant opportunity loss to investors who have stayed with this fund in this period.

A more disturbing aspect of the fund's performance is its underperformance of bellwether indices such as the Sensex and its benchmark the BSE 200. The Sensex has registered a 16 per cent appreciation over a one-year period. The bias towards software and pharmaceutical stocks could probably explain the setback in the recent times.

However, recouping performance may take time in light of the recent changes in the fund's management team, with the portfolio manager Mr Dhawal Mehta, leaving in end-2004.

Alliance Capital has also inked a deal with Birla Sun Life for the takeover of the former's schemes by the latter. Investors could probably re-evaluate the fund's performance after the change in management takes formal effect.

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