FUND PICK: Reliance Tax Saver Fund

Higher concentration, but higher returns

Reliance Tax Saver Fund, launched in September 2005, has been in the top 30 percentile (CRISIL Fund Rank 1 and 2) of the CRISIL Mutual Fund Rankings for the past four quarters. The fund, which since inception has been managed by Ashwani Kumar, has average assets under management (AUM) of Rs 3,458 crore as of December 2014 and belongs to the Equity Linked Savings Scheme (ELSS) category. Investments in ELSS funds come with a lock-in period of three years and are eligible for tax deduction of a maximum Rs 1.5 lakh under Section 80C of the Income Tax Act.

The fund’s primary objective is to generate long-term capital appreciation by investing predominantly in equity and equity-related instruments. It can invest up to 20 per cent in debt and money market instruments.

Performance

The fund has consistently outperformed its benchmark (S&P BSE 100) and the ELSS category across various time frames. The fund marginally underperformed the benchmark and the category during the bull phase of 2003 to 2007. It picked up pace in December 2007 and thereafter consistently outperformed both the benchmark and the category across all market phases. The maximum outperformance was during the post-European crisis phase (June 2013 to February 2015); it returned 63.48 per cent vis-à-vis the benchmark’s 28.96 per cent and category’s 43.02 per cent.

An investment of Rs 1,000 at the inception of the fund would have appreciated to Rs 4,832 as on February 6. A similar amount invested in the category and the benchmark would have yielded Rs 3,817 and Rs 3,344, respectively, during the same period.

A monthly systematic investment plan (SIP) of Rs 1,000 for a period of three years would have grown to around Rs 66,896 (an investment of Rs 36,000), delivering an annualised return of 46.45 per cent as on February 6, 2015. A similar investment in the benchmark would have grown to Rs 49,799, returning 23.12 per cent.

The fund is slightly more volatile than its benchmark and the category. Its volatility over a period of three years ended February 6, 2015 is 18.89 per cent compared to the benchmark’s 18.11 per cent and category’s 16.91 per cent. However, the fund gains on the risk-return trade-off by giving higher risk-adjusted returns (Sharpe ratio) of 1.80 against the benchmark’s 0.89 and category’s 1.48. The same is also reflected through Jenson’s Alpha, (a risk-adjusted measure of excess returns over market returns) where fund has given an Alpha of 19.48 per cent compared to the category average of 10.69 per cent.

Portfolio Analysis

The fund is concentrated at both stock and sector levels. The fund has held 45 stocks on an average vis-à-vis the category’s 50 in the past three years. As of December 2014, the fund’s average holding for top five companies is 29.48 per cent of its net assets against 26.04 per cent of its peers. At the sector level, the fund’s exposure to the top five sectors is 60.22 per cent vis-à-vis the category’s average of 58.17 per cent.

The fund capitalises on the three-year lock-in period of the ELSS category by investing largely (62 per cent in the past three years) in small and mid-cap stocks against 31 per cent exposure to small and mid-cap stocks by the category.

Industrial capital goods, auto, auto ancillaries and banks have been the fund’s most favoured sectors in the past three years. Compared to its peer group, the fund’s overexposure to auto and auto ancillaries has helped score good returns as the sector (represented by CNX Auto) returned 28.67 per cent compared to benchmark returns of 17.58 per cent in the past three years. Under the auto and auto ancillaries sector, the fund had exposure to good performing stocks such as Eicher Motors, TVS Motor, Maruti Suzuki, Wheels India, and Sundaram Clayton.

Under-exposure to non-performing sectors such as power (represented by S&P BSE Power) and metal (represented by CNX Metal), which yielded negative returns in the past three years, helped the fund escape a dent in its performance.