This is the time of the year when investors make a beeline to Equity Linked Investment Schemes (ELSS), a type of mutual funds which allows you save tax up to an investment of Rs one lakh, provided you keep the money in the fund for a minimum of three years. Fortuitously this has coincided with a correction in the stock market where valuations have come down to reasonable levels, which makes it a good point of entry for these one time investments. Fundamentally speaking, there is no reason to disbelieve that the Indian corporate sector can chug along at an average earnings growth of about 15% over the next three years. In such a situation, if one enters the market and stays on for at least three years, the chances are more than even that the returns would be quite decent, especially when one throws in the tax saving angle as well.

Birla Sun Life Tax Relief 96 is one of those long serving ELSS floated by Birla Sun Life Asset Management, a joint venture between the Aditya Birla Group and Sun Life Financial Inc. of Canada. The scheme has the objective of long term growth of capital through a portfolio with a target allocation of 80% equity, 20% debt and money market securities. It follows a bottom-up approach to investing, where the stated focus is on long term fundamentally driven values.

Birla Sun Life Tax Relief 96

Portfolio Allocation

This approach has apparently stood the fund in good stead when one looks at the performance especially over a five year period. Since inception and over the past five years the fund has given a compounded average return of 38.72% and 34.22% respectively compared with the 14.30% and 30.16% returns from its benchmark index, the BSE 200. In terms of performance comparison, over a period of one year it is near the top of its category. However, over a three year horizon, the returns which are at near the category median, is not very impressive.

One very interesting thing about this fund is the huge dividends that it has paid out. In this financial year itself, it has forked out an astounding 1510% as dividend! The previous dividend payout was in financial year 2004 when it paid a 100% dividend. The fund has apparently decided to substantially reward its investors in cash rather than holding onto the money and investing. This generous dividend pay out might have also worked as a tonic in growing the assets under management which has multiplied about five times in the last few months from Rs 50 crores in November 2006 end to Rs 314 crores as at the end of February 2007.

Coming to the investment style, the fund manager Ajay Gars says that it is a blend of growth investment and value investment. Fund is invested across all the major sectors. Investment choice is not market cap biased and stocks are picked on its performance basis.

Looking at the portfolio one sees that there is a fair amount of churn. When queried by myiris.com, the fund manager said that this is on account of the huge flow of money coming in to the fund the past few months. The fund has added as much as 25 stocks in the past six months which takes the total stocks held at February 2007 end to about 33.

The exposure is more towards large cap stocks with the top three sectors, Industrial Capital Goods, Software and Banks accounting for about 38% of the portfolio. The fund is holding approximately 10% of its portfolio as cash as well. The top ten stocks account for about 45% of the portfolio. Led by Reliance Industries and Infosys Technologies the top stocks held is a mix of stocks across sectors including United Breweries (Holdings) Limited, presumably a value stock.

In the past one month, it added Crompton Greaves and Reliance Energy into its portfolio while completely exiting ICICI bank and ITC. Garg, the fund manager is bullish on capital goods sector and goes on to add that the emphasis on the infrastructure sector along with the power sector reforms and the upcoming mega power projects has given a big boost to the engineering and capital goods industry. The indigenous industry will invest substantially in building up the requisite capacity to cater to the various sectors, he says.

Coming to the volatility of the market, the fund manager believes that investors in this fund have a long term horizon as there is a locking period of three years and therefore need not worry about short term volatility. Over a period of 5-10 years, investors in this fund could get a return 15%-18% compounded annually in addition to tax savings, he feels.