Kotak Tax Saver

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.

Kotak Tax Saver (KTS) is one such open-ended tax saving fund from the stable of Kotak Mutual Fund. KTS is primarily mandated to invest in equities and equity-related securities of Indian companies along with debt and money market instruments. Launched in November 2005, the fund has been in existence for more than 6 years now.

Investment Objective and Proposition

The fund’s primary investment objective is “to generate long-term capital appreciation from a diversified portfolio of equity and equity related securities and enable investors to avail the income tax rebate, as permitted from time to time. There is no assurance that the investment objective of the Scheme will be achieved.”

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 to manage its liquidity requirements.

Over the past one year, KTS’s exposure to large cap stocks has been in the range of 63% - 72%, while its exposure to mid & small cap stocks has ranged from of 25% - 34%. The fund’s exposure to debt and cash over the past one year has never been more than 10% which indicates its tilt towards staying invested in equities with occasional cash calls. As per the portfolio disclosed on January 31, 2012, the fund has allocated 64.6% to large caps while its investment in mid & small caps stands at 28.3% and exposure to cash has been petite 7.1%.

Equity Portfolio

Top 10 holdings (in %) on January 31, 2012
(Source: ACE MF, PersonalFN Research)

As indicated by the table above, KTS’s top-10 equity portfolio constitutes of all ‘A’ group stocks. As on January 31, 2012 the fund held in all 62 stocks in portfolio out of which ‘A’ group stocks accounted for 75.8% and the rest 24.2% were the ‘B’ group ones. The fund holds a portfolio which is diversified across sectors and stocks. The top-10 stocks accounted for 39.7% of the portfolio while Top-5 sector concentration stood at 44.3% for its recent portfolio (i.e. as January 31, 2012). Being benchmarked against S&P CNX 500, the fund manager has moderately churned the portfolio as revealed by its portfolio turnover ratio of 1.35 times.

The fund uses the bottom up approach for construction of the portfolio. Although the fund manager has the freedom to invest across market capitalisations; a significant part of the scheme is invested in large cap stocks as a part of risk mitigation process. Following the blend style (i.e. a combination of growth and value) of investing; the fund invests in stocks that are priced at a material discount to their intrinsic value. Such intrinsic value is a function of both past performance and future growth prospects. Stocks are filtered on the following considerations:

• The financial strength of the companies, as indicated by well recognised financial parameters;
• Reputation of the management and track record;
• Companies that are relatively less prone to recessions or cycles, either because of the nature of their businesses or superior strategies followed by their management;
• Companies which pursue a strategy to build strong brands for their products or services and those which are capable of building strong franchises;
• Market liquidity of the stock.

How KTS has fared vis-à-vis its peers?

(NAV data is as on February 23, 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 KTS’s performance has not been very luring when compared to top performers in the category. Moreover, the fund has underperformed the benchmark index – S&P CNX 500 across time frames. It has clocked returns of 26.4% CAGR over the 3-Yr as against the 27.0% CAGR returns generated by S&P CNX 500 over the same time frame.

When assessed on the volatility front, KTS has exposed its investor to lower risk (as revealed by its Standard Deviation of 7.76% which is lower than that of its benchmark), and has been partially successful in clocking attractive risk-adjusted returns (as revealed by its Sharpe Ratio of 0.20 which is at par with the Sharpe ratio of its benchmark). However the Sharpe ratio of KTS looks average when compared with that of some of the top performers in the category. This makes it a low risk- medium return investment proposition as compared to its peers.

Fund Manager Profile

In a nutshell...

As seen above the performance of Kotak Tax Saver has been average. Over a 3-Yr time frame, the returns are mediocre as the fund fails to match even the category average returns.

KTS has managed the risk well by being less volatile than its benchmark. However, the returns generated by the fund look rather dull when compared with those generated by some of its category peers. Its Sharpe ratio too looks average against that of its category peers. This makes it an average performer.

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 selection of the 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.