FundsIndia Recommends: Tata India Tax Savings

In our previous Select Funds review, we had introduced Tata India Tax Savings in the tax-saving fund category. This fund has climbed steadily up the ranking charts since 2015, thanks to correct calls on sectors and stocks. It makes good use of the flexibility to move across market capitalisations, using the ongoing midcap rally to stay ahead. In the 1, 3, and 5-year periods, the fund has beaten the category average by a margin of 2-3 percentage points.

Being a tax-saving fund, investments in Tata India Tax Savings qualifies for tax benefits under Section 80C. With traditional tax-saving options such as provident funds, fixed deposits, and the NSC yielding increasingly lower returns, the equity exposure of tax-saving funds will see that you do not compromise on your wealth.

Given its higher allocation to midcaps, Tata India Tax Savings requires a higher risk appetite. Those looking for a lower risk option can opt for Franklin India Taxshield.

Performance

Tata India Tax Savings has been improving on its performance over the past couple of years, especially compared against its peers. The fund’s stated benchmark is the Sensex. However, the index hardly makes for a good comparison given the diversified nature of the fund, which holds only about half the portfolio in large-cap stocks.

Against the much broader and more representative Nifty 500 index, the fund has done very well. Rolling its 3-year return over the past five years, the fund has beaten the index 97 per cent of the time, pointing to a good level of consistent performance. Since mid-2015, its performance compared to its peer average has also been improving. It is able to beat the category average by a widening margin. Its consistency score, therefore, is picking up. Against the category average, the fund has been able to do better 54 per cent of the time. In correcting markets, the fund has usually been able to contain declines better than the category average.

Where the fund scores extremely well is on the risk-return metric, measured by Sharpe. On this count, Tata India Tax Savings holds the best score of its category indicating that it is able to deliver the best return for the level of risk it takes. A lower-than-average volatility complements the high Sharpe. Only a few funds such as Franklin India Taxshield or DSP BlackRock Tax Saver can boast of this combination of long-term consistency, low volatility, and high risk-adjusted return.

Portfolio

Tata India Tax Savings holds a diffused portfolio, with individual stocks rarely accounting for more than 5 per cent; its top ten holdings is less than a third of its portfolio. Midcap exposure is higher compared to its category, averaging around 31 per cent against the category’s 28 per cent. That’s nearly double the more conservative Franklin India Taxshield. The fund did drop the holding in the turbulent January to March 2016 and along with a move into cash to about 8-9 per cent of the portfolio, it managed the fall quite well. The fund predominantly picks stocks with growth prospects, and not necessarily cheap. Its fund manager changed in 2015, following which it took a more buy-and-hold approach and low portfolio churn.

In the past few months, the fund dropped financial stocks (Cholamandalam Investment & Finance, Ujjivan Financial Services, PNB Housing Finance) in favour of bank stocks. This may be a prudent move given the run up in these stocks and the growth prospects of banking. The fund has also moved towards consumption through relatively under-the-radar sectors such as retailing, besides FMCG, consumer discretionary and automobiles and auto ancillaries. The fund balances out this consumer exposure through higher holdings in promising sectors of infrastructure and related, power, and industrial goods. It has limited exposure to the troubled software sector. Its current portfolio, therefore, is positioned to benefit both a consumption recovery and the investment-driven economic growth.

Rupesh Patel is the fund’s manager and it has an asset size of Rs 486 crore. Since it is a tax-saving fund, each investment will be locked in for 3 years. Long-term capital gains are tax-exempt.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.