FundsIndia Recommends: Motilal Oswal Long Term Equity

Motilal Oswal Long Term Equity is a good option in equity-linked savings schemes – equity funds that qualify for tax deductions under Section 80C of the Income Tax Act. The fund crossed the 3-year mark from its launch in January this year. Since its inception, its returns are a good 18.6% compounded annually.

Motilal Oswal Long Term Equity is a fund we added to our recommended list in our recent June quarter review, even with its limited history. One, the fund’s portfolio and strategy is similar to another top fund from the same house, Motilal Oswal Multicap 35. The latter fund is a more established fund with a strong performance record and is among the quality ones in its category. Two, for the time of its existence, Motilal Oswal Long Term Equity has beaten other tax-saving funds on most metrics and has been able to deliver market-beating returns. Three, the fund offers a strategy that is unique among its peers.

While the fund shares a similar strategy with its older sister fund, it’s added tax benefit is the key reason for our adding this to our ‘Select list’.

Strategy

Motilal Oswal Long Term Equity (Motilal LTE) holds a concentrated portfolio of less than 30 stocks, with the top 10 stocks making up more than half the portfolio. This is similar to Motilal Oswal Multicap 35. However, Motilal LTE’s mandate does not limit the number of stocks it can hold, unlike Motial Oswal Multicap 35. However, the portfolio overlap between the two funds is high. Between the two funds, about 70% of the portfolio is common. This and the strategy overlap indicates that Motilal LTE, by and large, is very similar to Motilal Multicap 35. This similarity provides some comfort in light of the fund’s short history.

Where the two funds differ is in the marketcap orientation. Motilal LTE is the more aggressive. Of late, the fund has about 70% large-cap stocks and the rest in midcap and smallcap. The large-cap share was lower in earlier months. The fund can swing fairly quickly between marketcap allocations over the months. Compared to other ELSS funds, Motilal LTE is somewhere in the middle of the pack in terms of mid-cap and small-cap exposure. It holds higher exposure to this marketcap segment than funds such as Franklin India Taxshield and Invesco India Tax Plan, but less so than those such as Aditya Birla Sun Life Tax Relief ’96, L&T Tax Advantage or Tata India Tax Savings.

Given its concentration on a small number of stocks, Motilal LTE follows a very stock-specific buy-and-hold approach. Its sector allocations do not have much in common with its benchmark Nifty 500. Among tax-saving funds, Motilal LTE’s strategy sets it apart; Invesco India Tax Plan is the closest comparable.

Suitability

A concentrated strategy can result in strong outperformance if stocks with heavy weights do well. However, the fund will have a smaller cushion to absorb the effect of stocks underperforming. This strategy, therefore, can be a relatively riskier one to follow. Two, Motilal LTE can get aggressive in its market cap allocations. Top portfolio weights have earlier been accorded to small-cap stocks as well. Three, the fund has not seen a prolonged phase of market correction and holds a short track record.

For these reasons, Motilal LTE suits those with a higher risk appetite. Investors who prefer lower risk can stick with steadier funds that maintain a large-cap bias such as Franklin India Taxshield. Investments in tax-saving funds have a lock-in for 3 years but a longer time frame of 5 years or more will help deliver better returns.

Performance and portfolio

On rolling 1-year returns since its inception, Motilal LTE is able to beat the average returns of tax-saving funds all the time. It is also able to beat older quality performers such as Aditya Birla Sun Life Tax Relief ’96 nearly 75% of the time. Against the Nifty 500 TRI, its outperformance on a rolling 1-year basis is 95% of the time.

Its concentrated approach and strong returns in top holdings has helped. Can Fin Homes, for example, a smallcap stock was earlier among the top portfolio weights, and an outperformer. Similar high-risk calls paying off include Astral Polytechnik, Mahanagar Gas and Jubilant Lifesciences. The fund has made timely exits or pared stake in these and several other stocks. The fund has also gained smartly from calls on HDFC Bank, IndusInd Bank, Maruti Suzuki, Tata Elxsi, Eicher Motors, Ashok Leyland, and Bajaj Finance.

It is, however, not immune to the trend of funds undershooting their benchmarks in the past 1 year. But the reason for this is the narrow rally in the market that involve only a handful of stocks; and not because of the fund’s inability to perform. The fund’s calls on stocks such as BPCL, Max Financial Services, and Petronet LNG for example, are weighing on latest returns. Motilal LTE has among the highest risk-adjusted return, though volatility is on the higher side given its exposure to the mid-and-small-cap segment. As it was launched in 2015, the fund has not weathered a market correction. However, going by 1-month rolling returns in the past 3 years and the instances of losses in this period, the fund has been able to contain losses slightly better than Motilal Oswal Multicap 35 and much better than most peers.

The fund has an AUM of Rs 1,056 crore. Gautam Sinha Roy and Siddharth Bothra are the fund’s managers and are Motilal Multicap 35’s managers as well. Investments in Motilal LTE will be locked in for 3 years.

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 for investment decisions. To know how to read our weekly fund reviews, please click here.