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Aarati Krishnan

AFTER an unimpressive start, Sundaram Tax Saver has registered a sharp improvement in performance over the past one year, generating a return of about 50 per cent over this period.

During the year, the fund has delivered lower returns than HDFC Taxsaver or the Birla Equity Fund, but has fared reasonably well in relation to most other tax-saving funds. A shift from large-cap index stocks, to cyclicals and mid-cap stocks appears to have been behind the fund's out-performance of the index.

Investors in the fund can stay with it, given the improvement in performance. With the sharp appreciation in market levels over the past six months, both existing and fresh investments in this fund could carry some downside risk.

Suitability: Risks associated with this fund would be on par with those for a normal diversified equity fund.

The fund sticks to prudential exposure limits of 5 per cent for each of the individual stocks in its portfolio. But it has at times, taken concentrated positions in specific sectors, such as banking.

Performance: The recent surge in the fund's NAV has helped it counteract the effect of a poorly timed launch, in November 1999.

The fund's returns were slightly better than those notched up by the S&P CNX Nifty in the first two years after launch; but the NAV still hovered below par by December 2001. Since then, the fund has managed a comeback, delivering returns of 60 per cent over the two-year holding period, even as the Nifty has managed about 28 per cent.

Portfolio review: The following facets of the fund's investment strategy stand out from a review of its portfolio since September 2002:

* The fund's returns from the recent rally may have been higher had it been fully invested. As things stand, over the past year, the fund consistently held rather high levels of cash in its portfolio.

It started out with a cash position of 12 per cent in September 2002, which rose steadily to 13.7 per cent by end of February 2003.

Though the fund cut back its cash position to 6 per cent over the next two months, the level has climbed back to 11 per cent in July 2003.

* The fund appears to have effected a distinctive change in strategy at the end of the first quarter of 2003. Earlier, the top ten holdings were entirely dominated by large-cap stocks and index constituents.

But since the March-April 2003 period, some of the midcap stocks have climbed to the top slots.

Between March and July 2003, holdings in ITC, BHEL, Tata Motors and ICICI Bank were pared, and replaced by Canara Bank, Bharat Forge and Matrix Labs.

* The fund has had an early mover advantage in respect of banking and some capital goods stocks. For instance, stocks such as BHEL, Thermax, and Century Textiles were part of the portfolio even in September 2002 and have paid off handsomely over the past six months.

Banking, accounting for 10 per cent of the assets, was among the largest sectoral exposure in the fund in September 2002.

The fund appears to be quite conservative in its profit-booking strategy. This may have resulted in its missing out on the last leg of the rally in some of the mid-cap holdings.

For instance, exposure in banking stocks was pared sharply between May 2003 and June 2003, from 25 per cent to 10 per cent of the assets. Banking stocks have progressed northwards in the three months since.

The fund has also exited stocks such as Tata Tea and Indo Gulf Fertilizers between June and July 2003, though both stocks have made significant gains in the period since July 2003.

But a conservative strategy on profit-booking may be in the best interests of investors in the fund, as it limits the downside risks from riding a bull market.

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