Mutual Funds

Principal Tax Saving Fund: Nimble moves keep it ahead of benchmark

Parvatha Vardhini C | Updated on January 15, 2018

tax saving



Smart management helps the fund latch on to rallies or cut losses in see-sawing markets

Being an equity-linked savings scheme, Principal Tax Saving Fund qualifies for deduction under Sec 80C. Eleventh-hour tax-savers can consider this fund.

With benchmark-beating returns across one-, three- and five-year periods and high consistency in performance, it is a good choice for investors with a moderate to high risk appetite.

Performance and strategy

Though Principal Tax Saving has been around for quite some time, the fund has pulled up its socks since 2012. Be it the rallies of 2012 and 2014 or the volatile markets of 2013, 2015 and 2016, the fund has convincingly outdone its benchmark, the BSE 200 index.

Deft asset allocation helps the fund latch on to rallies or cut losses in see-sawing markets. While the fund held 89-93 per cent in equities in the second half of 2011, it pushed up its equity holdings to 96-97 per cent by March 2012.

Considering that the 2012 rally was fuelled by mid-cap stocks (stocks with market capitalisation of ₹10,000 crore or less), its 20-25 per cent exposure to mid-caps in this period also helped.

Again, the fund was quick to bring down its equity allocations in 2013 while pushing it up to over 95 per cent throughout 2014. Shifting to cyclical sectors such as autos and banks stood the fund in good stead in this period as well.

Holdings in automobiles moved from around 8 per cent in January 2014 to 12 per cent by June 2014. Exposure to banks steadily moved up during 2014 by 9 percentage points to 23 per cent by December.

Overall, the fund has outperformed its benchmark by 7- 9 percentage points in one-, three- and five-year periods. Its one-year rolling returns in the last five years stand at 98 per cent. This indicates that an investment in the fund at any point in time in the last five years had a 98 per cent chance of beating the returns of the BSE 200 index.


The fund usually holds a portfolio of 60-70 stocks. The holding is quite diffused with exposure to any one stock rarely exceeding 5 per cent.

The top sectors right now are a combination of cyclicals and defensives, such as banking, cement, software and consumer non-durables.

Banking picks are predominantly from private banks, although the fund holds SBI and Bank of Baroda currently. Considering the headwinds in the IT space, holdings in software have halved in the last one year.

In its latest portfolio, the fund holds about 28 per cent in mid-cap stocks. While the holding may seem to be on the higher side given the fact that mid-cap valuations have soared, the three-year lock-in for an investor putting in money right now will help tide over the volatility. The lock-in will also cushion any fall in the NAV due to market corrections, to an extent.

Also, the fund has invested in quality stocks in the mid-cap space, such as City Union Bank, Ashoka Buildcon, IRB Infra, KEC International, Kalpataru Power Transmission, Bajaj Electricals and Mahindra Holidays.

The government’s thrust on power and infrastructure development, especially in the rural areas, will benefit these stocks over the medium term.

Published on March 19, 2017

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