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S. Vaidya Nathan

INVESTMENTS in the HDFC Tax Plan can be considered despite the sharp run-up in equity prices over the past six months. The fund has turned in an impressive performance by focussing largely on mid-cap stocks. This category has been the top performer in 2003.

The fund managed to churn its portfolio well, book profits and move into stocks with potential at regular intervals. This track record suggests that it may be able to handle any downside risk without much damage.

The fund has generated returns of about 35 per cent per annum since its launch in December 2000. Over the past year, the NAV has risen by about 85 per cent. Investments in this fund have a three-year lock-in period if tax benefits of a rebate under Section 88 of the Income-Tax Act are availed of. Over such a time horizon, there appears to be room for value gains, even in mid-cap stocks, which are pricey now.

But fresh exposures can be done in a phased manner by investing small sums on a monthly or quarterly basis. This will enable would-be investors to capitalise on the broad market weakness that may manifest following the relentless run-up in equities over the past four months.

Suitability: The HDFC Tax Plan has a well-diversified portfolio. But the risks are higher than the typical diversified fund due to the focus on mid-cap stocks. These stocks have the potential for outsized gains. But due to lower liquidity levels, downside risks also get magnified.

The impact cost of buying and selling sizeable quantities also tends to be higher in such stocks. The fund is appropriate for investors with a higher risk preference and with the ability to stay invested through any volatile periods for stock prices as well.

So far, the returns have more than compensated investors for the higher risk element involved. Investors may stay with the dividend option due to its tax efficiency.

Portfolio overview: The fund has invested in economic growth with its thrust on engineering, paints and banking sector stocks. The absence of significant exposures to the information technology sector has also helped improve returns. As has been the case since its launch, the fund's top ten holdings (see Table) present an offbeat strategy.

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