HSBC Tax Saver Equity 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 it also provides an opportunity to create wealth in one’s tax-saving portfolio. Moreover, the lock-in period of 3 Years encourages long-term investing, which is a pre-requisite for fruitful return on equity investments. A well managed tax-saving fund 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.

HSBC Tax Saver Equity Fund (HTSEF) is one such open-ended tax saving fund from the stable of HSBC Mutual Fund, which follows a blend style of investing. HTSEF is primarily mandated to invest in equities and equity-related securities of Indian companies along with debt and money market instruments. Launched in January 2007, the fund has been in existence for a little over 5 years now.

Investment Objective and Proposition

The fund’s primary investment objective is "to provide long term capital appreciation by investing in a diversified portfolio of equity & equity related instruments of companies across various sectors and industries, with no capitalization bias. The Fund may also invest in fixed income securities."

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

Over the past one year, HTSEF has held a major part of its portfolio (63% - 75%) in large cap stocks, thereby adopting a defensive stance in a scenario where the markets were turbulent in the year 2011. Thus in the mid & small cap segment too, the fund in the past one year has restrained its holding in the range of 21% - 34%. But despite the turbulence of 2011, the fund has refrained from taking aggressive cash calls by having not more than 7% in cash & cash equivalents, which indicates its tilt towards staying invested in equities. As per the portfolio disclosed on December 31, 2011, fund has allocated 73.5% to large caps, 21.1% in mid & small caps and has held 5.4% in cash & cash equivalents.

Equity Portfolio

Top 10 holdings (in %) on December 31, 2011
(Source: ACE MF, PersonalFN Research)

As indicated by the table above, HTSEF Top-10 equity portfolio constitutes only of ‘A’ group stocks. As on December 31, 2011 the fund held in all 33 stocks in portfolio out of which ‘A’ group stocks accounted for 90.9% and the rest 9.1% were the ‘B’ group ones. Top-10 stocks comprised of 48.3% of the portfolio while top-5 sector concentration stood at 43.6%.

HTSEF being benchmarked against BSE-200 holds a fairly concentrated portfolio of equities without any bias towards any specific market cap segment. However, conviction does appear in the stocks held by HTSEF, as the fund manager has refrained from churning aggressively as revealed by its petite portfolio turnover ratio of 0.51 times.

Fund largely follows the multi cap strategy where the fund manager tries to keep the exposure to various market cap segments in a specified range. While picking stocks for its portfolio, the HTSEF follows a combination of both - top down as well as a bottom up approach, and focuses on:

• The fundamentals of the business
• The industry structure
• The quality of management
• Corporate governance trends
• Sensitivity to economic factors
• Key earning drivers
• The financial strength of the company
  
  

How HTSEF has fared vis-à-vis its peers

(NAV data is as on February 08, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)

The table above reveals that HTSEF has been an average performer, in the category. Over a 3-Yr time frame the fund, has clocked returns of 24.0% CAGR, but as seen above the returns are lower than the return of 25.7% CAGR clocked by its benchmark BSE-200 during the same time frame.

When assessed on the volatility front, HTSEF has exposed its investor to lower risk (as revealed by its Standard Deviation of 6.93%), but has been partially successful in clocking appealing risk-adjusted returns (as revealed by its Sharpe Ratio of 0.19; which is higher than the Sharpe ratio of 0.18 clocked by its benchmark). However the Sharpe ratio of HTSEF looks average when compared with some of the top performers in the category. This thus makes HTSEF a low risk- medium return investment proposition as compared to its peers.

Fund Manager Profile

In a nutshell...

Performance of HSBC Tax Saver Equity Fund looks appealing on standalone basis however when compared with its category peers the same looks average. Having said this, thrust on large caps and lower portfolio churning makes it less risky than its peers. We believe that those investors who have invested in HTSEF may remain invested. However any fresh exposure should be avoided. One may prefer better performing funds with a proven track record.

ELSS mutual funds can provide you with an excellent wealth creation avenue, apart from helping you avail the tax deductions. However, the investment in ELSS doesn’t come without risk and hence requires your attention at the time of selecting a fund. Investment done without proper assessment may prove to be a blunder if your selection goes wrong. Thorough research of available options may help you take a well informed decision.