BOI AXA Tax Advantage Fund

Tax-saving funds (also referred to as Equity Linked Savings Schemes - ELSS) are well suited for investors willing to take risk. However, at the same time they also provide an opportunity to create wealth. Moreover, the lock-in period of 3 years encourages long-term investing, which is a pre-requisite for fruitful return on equity investments. Well-managed tax-saving funds can serve a dual purpose i.e. provide tax benefits (under Section 80C of the Income Tax Act, 1961) and assist investors' to accumulate wealth over the long-term. But to do so, the key lies in selecting a well-managed tax-saving fund with a long-term horizon.

Bharti AXA Tax Advantage Fund (BATAF) is an open-ended tax saving fund from the stable of Bharti AXA Mutual Fund. BATAF is primarily mandated to invest in equities and equity-related securities along with debt and money market instruments. Launched in February 2009, the fund has been in existence for a little over 3 years now.

Investment Objective and Proposition

The fund's investment objective as per its offer document is "to generate long-term capital growth from a diversified portfolio of predominantly equity and equity-related securities across all market capitalisations. The Scheme is in the nature of diversified multi-cap fund. The Scheme may invest in derivatives, if and to the extent permissible under the Regulations and the ELSS Rules, for hedging and portfolio balancing and optimizing returns. However, there can be no assurance that the investment objectives of the Scheme will be realised. The Scheme is not providing any assured or guaranteed returns."

The fund is mandated to invest 80% - 100% of its total assets in equity and equity-related securities and the rest (i.e. upto 20%) in debt and money market instruments to manage its liquidity requirements.

Over the past one year, BATAF's exposure to large cap stocks has been in the range of 71% - 91%, while its exposure to mid & small cap stocks has ranged from of 4% - 24%. The fund's exposure to debt and cash over the past one year has rarely been above 10% which indicates its tilt towards staying invested in equities. As per the portfolio disclosed on February 29, 2012, the fund has allocated 90.0% towards large caps, a petite 4.2% in mid & small cap and has preferred to hold cash to extent of 5.8% of its total portfolio.

Equity Portfolio

The fund holds a fairly diversified portfolio of 49 stocks. Top 10 stocks account for 52.4% while allocation to Top 5 sectors has been 46.4% as per the portfolio disclosed on February 29, 2012. The fund manager has moderately churned the portfolio which is revealed by the portfolio turnover ratio of 1.12 times. BATAF is benchmarked against S&P CNX Nifty

BATAF follows a multi-cap style as it endeavours to generate superior return by investing in equity and equity related instruments across the market capitalizations. Moreover to build its portfolio, BATAF follows a top-down approach and looks into the following points for identifying potential themes and stocks:

·         Global and Indian economic scenario

·         Domestic policy environment

·         Stock valuations

However for the final stock selection process, BATAF follows the bottom-up approach, along with a qualitative framework of MVPS (Macro, Valuation, Policy and Sentiment) for its asset allocation.

How BATAF has fared vis-à-vis its peers

The table above reveals that BATAF has displayed a satisfying performance in the last 3 years by delivering a 30.2% CAGR, and has outperformed its benchmark index by a considerable margin. The fund was launched when Indian equity markets were bottoming out. This seems to have given BATAF the advantage of buying equities at attractive valuations.

However, when assessed on the volatility front, BATAF as compared to its category peers, has exposed its investor to high risk (as revealed by its Standard Deviation of 9.08%), and at the same time, has generated average risk-adjusted returns (as revealed by its Sharpe Ratio of 0.22) for its investors. This thus makes BATAF a high risk-average return investment proposition.

Fund Manager Profile

As seen above, Bharti AXA Tax Advantage Fund has been able to deliver satisfying performance only by the virtue of it being launched when the Indian equity markets were nearing the bottom during February 2009 (which enabled the fund manager to build the fund's portfolio at attractive valuations). The performance of BATAF looks pretty average when compared to that of some of its category peers. Moreover, the concentrated top-10 stock portfolio and top-5 sector portfolio makes BATAF vulnerable to greater risk.

Given that the fund has generated average risk adjusted returns despite having been launched during the bear market phase; we recommend you to redeem BATAF if you have a low to moderate risk appetite.

A tax saving fund can be a wealth creator provided you are selective about your options. Investment done at eleventh hour can prove to be hazardous as you tend to invest with a sole motive of tax saving and chances are greater that you may commit a mistake while zeroing on the fund. You may be better off by investing in a fund which has a proven track record of performance across market cycles and which comes from a fund house that follows systems and processes.