Fund Call: Principal Tax Savings - Performs well across market cycles

The fund has made the most of market opportunities with smart calls



Investors looking to invest in Equity Linked Savings Schemes can bet on Principal Tax Savings fund. Investment in this fund has a three-year lock-in and qualifies for deduction under Sec 80C of the Income-tax Act up to Rs 1.5 lakh. The fund boasts of a return (annual) of about 20 per cent in the last five years, higher than peers such as DSPBR Tax Saver, HDFC Tax Saver and L&T Tax Advantage. Benchmarked to the BSE 200 index, the fund typically takes about 25-35 per cent exposure to mid- and small-cap stocks ( i.e. those with market capitalisation of below Rs 10,000 crore). Hence, it may be suitable for those with a higher risk appetite.

Principal Tax Savings displays an ability to tide through all market conditions quite well. Be it the rally of 2012, 2014 and 2017 or the iffy markets of 2013, 2015 and 2016, the fund has delivered returns quite convincingly above its benchmark. It achieves this through deft asset allocation and a right combination of sector and stocks. For instance, the fund was quick to bring down its equity allocations in 2013 when the markets turned volatile; at the same time, it was quick to move equity holdings to over 95 per cent to ride on the bull run in 2014. Shifting to cyclical sectors such as autos and banks also stood the fund in good stead in 2014. While its tendency for higher mid-cap holdings has helped the fund ride on the rally this year, considering the markets have moved up sharply, the fund has played it cautious with equity holdings in the range of 90-95 per cent in the last few months.

Over one-, three- and five-year periods, the fund has outperformed the benchmark by 6 to 14 percentage points. On a one year rolling return basis, the fund has bettered the benchmark 98 per cent of the times in the last five years and hence scores high on consistency of returns.



Portfolio choices

The fund usually holds a portfolio of 60-70 stocks. The holding is quite diffused with exposure to any one stock rarely exceeding 5 per cent. Burgeoning valuation of mid cap stocks since the 2014 rally has seen the fund bringing down exposures to mid-caps a bit in the last two years. Yet it still holds about 28 per cent in mid-cap stocks currently. While this ups the risk in the current juncture, the fact that the fund has turned defensive in its sector picks should balance it out well. Besides, although mid- and small-cap stocks may be prone to corrections in the near to medium term, the three-year lock-in gives a chance for the fund to recoup losses, if any, without redemption pressures.

Exposure to the defensive consumer non-durables segment has slowly inched up since 2016 and is at about 10.2 per cent now (double of 2015 levels). It has also upped its exposure to Pharma stocks , another defensive space. Given the headwinds in the pharma space, the fund had reduced holdings in 2015 and 2016. But it seems to be finding value here currently.

The top sectors right now are a combination of cyclicals and defensives, such as banking, consumer non-durables, pharma and automobiles. Banking stocks in its portfolio include private sector banks (ICICI, HDFC, Kotak Mahindra and Axis Banks) and housing finance companies ( HDFC, Dewan Housing). NTPC, Coal India, Vijaya Bank and NALCO have been added recently.

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