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The fund seeks to build a high quality growth oriented portfolio to provide long term capital appreciation through investment primarily in equities.

A moderate performer within the tax saving category for much of its ten-year existence, Principal Tax Saving has displayed a marked improvement in its returns over the past three years. The fund's 3-year CAGR of 19.2 per cent puts it among the top three funds in the category, beating the benchmark by 9 percentage points and the category by 5 percentage points. Its returns were notable in 2012, 2013 and on a year-to-date basis as well. This has seen its Value Research Ratings also improve to 4 stars from 1 star in 2011.

There has been a shift in this fund's market cap bias in the last five years. Prior to 2009, the fund was primarily a small- and mid-cap stock oriented ELSS fund. Until end of 2008, small-caps made up as much as a third of asset allocation, mid-caps chipped in with another 20-25 per cent with only the remaining portion reserved for large-cap stocks. But the massive market fall of 2007-08 seems to have prompted a rethink of this strategy.

The fund began to sharply peg up its large-cap exposures from 2009, generally keeping it at 60-70 per cent until 2011. Thereafter, large-cap exposures have seen a slight moderation to 55-60 per cent levels. While small-cap weights have been pruned quite actively (now sub-15 per cent), mid-cap allocations have risen (28-30 per cent in recent months). Compared to its peer group, this fund is a tad under-weight in large-cap stocks. The improvement in the fund's returns have therefore come about alongside a moderation in its risk profile.

Over its more than 10 years history, this fund has had many ups and downs, making for a rather inconsistent show. For instance, the period from 2003 to 2007 saw substantial out performance of both the benchmark and category with the fund trumping both year after year. But the correction of 2007 and thereafter saw the returns suffer. Given that there are other funds in this category with a better long-term record of returns as well as risk control, we would recommend that investors track the fund for sustained improvements before committing significant funds.

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