IDFC Tax Advantage: Doing a fine balancing act

The fund juggles its sector and stock choices well, depending on market conditions

The March 31 deadline for making your tax-saving investments is fast approaching. Investors looking for equity linked savings schemes (ELSS) can consider IDFC Tax Advantage.

Investment in this fund has a three-year lock-in and qualifies for deduction under Section 80C of the Income-tax Act up to ₹1.5 lakh.

The fund boasts of a return (annual) of about 21 per cent in the last five years, higher than peers such as Franklin India Tax Shield, ICICI Pru Long-Term Equity and L&T Tax Advantage. Benchmarked to the BSE 200 index, the fund typically takes about 25-30 per cent exposure to mid- and small-cap stocks (that is, those with market capitalisation below ₹10,000 crore) across all market conditions. Hence, it may be suitable for those with a higher risk appetite.

IDFC Tax Saver balances its asset, sector and stock choices well, depending on market conditions. In bull markets,

it goes all out to cash in on the rally by increasing its equity holdings to over 95 per cent of its portfolio, riding on midcap stocks and turning to cyclical sectors. But during bearish/choppy market conditions, the fund contains losses by playing defensive in its asset and sector allocations.

For instance, in the 2012, 2014 and 2017 rallies, the fund took up to 35-40 per cent exposure to midcap stocks. It held over 95 per cent in equities most of the time and preferred cyclical sectors auto/auto ancillary, industrials and construction for its top holdings.

But in iffy markets such as 2015 and 2016, the fund reduced its equity exposure to about 85-95 per cent of its holdings and upped allocations to defensive sectors such as pharma and consumer non-durables.

This deft balancing has helped the fund beat its benchmark convincingly through all market conditions quite well.

Over one-, three- and five-year periods, the fund has outperformed the BSE 200 by 5-13 percentage points.

Portfolio

The fund usually holds a portfolio of about 70 stocks. The holding is quite diffused with exposure to any one stock rarely exceeding 5 per cent. Given that it has a penchant for mid and small-cap stocks, it currently holds about 32 per cent in these stocks. This ups the risk a bit in the current juncture as the markets have turned choppy.

But although mid- and small-cap stocks may be prone to corrections in the near to medium term, the three-year lock-in for an ELSS fund gives a chance for the fund to recoup losses, if any, without redemption pressures. This provides some comfort.

Among sectors, banking is the fund’s top preference. It has exposure predominantly to private banks such as HDFC Bank, ICICI Bank, IndusInd Bank and Kotak Mahindra Bank, only recently having added SBI.

It is also betting on the upturn in the auto industry with exposures to Maruti Suzuki, Hero MotoCorp and Tata Motors.

Stocks such as Greenply, Cadila Healthcare, Bosch, Sundram Finance are recent additions.

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