Principal Tax Savings: With risks come high returns

The fund usually takes high exposure in mid- and small-cap stocks to boost returns

Principal Tax Savings Fund is a good bet among equity-linked savings schemes. Investments in these schemes have a three-year lock-in period and are eligible for deduction of up to ₹1.5 lakh under Section 80C for the purpose of saving taxes

The fund boasts of 18 per cent returns in the past five years, higher than peers such as Franklin Tax Shield, HDFC Tax Saver and ICICI Pru Long Term Equity. Benchmarked to the Nifty 500 TRI, the scheme usually takes high exposure of over 35-40 percent in mid- and small-cap stocks to boost returns. Hence, it may be suitable for investors with a high risk appetite.

Performance and strategy

Principal Tax Savings does very well in bull markets, thanks to its high exposure to mid- and small-cap stocks. In the market upswings of 2012, 2014 and 2017, the fund outperformed its benchmark by 10-12 percentage points. In the volatile markets of 2013, 2015 and 2016, too, it managed to hold its head above water.

The fund has been able to achieve this performance through an asset allocation strategy and a combination of sectors and stocks in tune with market conditions. For instance, it was quick to bring down its equity allocations in 2013 when the markets turned volatile. It was also quick to move its equity holdings to over 95 per cent to ride on the bull run in 2014. The fund also shifts to cyclical sectors such as autos and banks during market upswings, while sticking to defensives such as consumer non-durables in iffy markets.

The scheme has not been able to hold its ground in the market fall of 2018, losing more than the Nifty 500 over the past year. This is predominantly due to its consistent mid- and small-cap holdings of 35-40 per cent in this period, even as these stocks dropped sharply. While this strategy has affected the fund’s one-year returns, considering that investments at any point in time have a lock-in of three years, a bounce back in mid- and small-cap stocks during this lock-in will help boost returns for investors.

Portfolio

The fund usually holds a diffused portfolio with over 50 stocks; holdings in a single stock don’t exceed 5-6 per cent.

In its latest November portfolio, mid-cap holdings constitute 38 per cent. The fund is currently invested in equities to the extent of 97 per cent.

It is playing the iffy nature of the markets at present by upping stakes in consumer non-durables. In this space, it has added to its holdings in ITC, and entered Marico in the last few months. Besides, the fund also holds Britannia, Dabur and GSK Consumer.

It also made timely additions to its software holdings this year to benefit from the improved prospects for the sector as well as the rupee depreciation. Both new and old private sector banks are the predominant bets in the banking space.

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