Launched in December 1995, HDFC Tax Saver Fund is a long serving equity linked savings scheme (ELSS), a genre of funds, wherein your investment qualifies for a tax rebate upto Rs 1 lakh. On the flip side, ELSS funds have a lock-in period of 3 years, allowing the fund manager to take a long-term view on the market. The stated objective of the HDFC Tax Saver is to seek long-term capital appreciation with minimum of 80% exposure to equity.

The fund has performed handsomely over the longer term horizon, posting annualised returns of 53.15% and 53.17% for the last three and five years compared with the modest 29.13% and 36.30% gains recorded by the benchmark index CNX Nifty 500 over the comparable period. The HDFC Tax Saver has been a leader within its peer group of ELSS funds as well recording a return of 52.53% in a three year time period versus the category median of 30%. At the same time, in the near term one-year period, its performance slipped a bit with one year returns at 34.15%, though better than the ELSS category median, is well behind the leaders in this category. Curiously, this has coincided with a big jump in assets under management that has climbed to Rs 763 crore as at December 2006, which more than doubled from the previous year’s level of Rs 217 crore. The fund has a beta of 1.02 (an indicator showing how volatile returns), a little above category median. The Sharpe ratio, which computes return earned for unit risk and is a little more sophisticated measure is at –0.59, better than the median of -0.64.

Commenting on the investment philosophy, Vinay R Kulkarni, senior fund manager who has recently taken charge, says that the stock picking approach is based on a set of well-established but flexible principles that emphasize the concept of sustainable economic earnings and cash return on investment. When one looks at the portfolio, it is apparent that the fund manager has been overweight on the large companies with high market capitalization, the so-called large caps. The accent has been on growth stocks as well, which generally reflects in higher price earning multiples. The fund portfolio has a price earning multiple of 25 compared with the category’s median multiple of 20.5.

As the fund seeks long-term capital appreciation, it has not been that aggressive in churning of portfolio taking a long-term view while investing in stocks. The number of stocks held in the portfolio is fairly static at 37, an increase of four stocks over a year, of which the top 10 stock accounts for about 48% of portfolio. The top five stocks in the portfolio as at Dec. 31,2006 are Tata Motors, Crompton Greaves, Thermax, Infosys and Satyam Computers. The top five sectors accounts for about more than 50% of the portfolio. The fund manager has been typically investing in 12 to 20 sectors on an average.

When queries by myiris, this is what the fund manager had to say about the prospects of the top two sectors in the fund’s portfolio, capital goods and automobiles. He said, “Given the strong visibility for investments planned both in the infrastructure space as well as by companies in the manufacturing sector, the prospects for the capital goods sector is promising. As far as the auto sector is concerned, strong trends in consumption should ensure steady growth in demand for two wheelers and four wheelers. The commercial vehicle sector’s fortunes are cyclical and need to be watched closely”.

On the whole, given that tax saving investments is the flavor of the season, here is a fund, which has had a good track record and shown consistency in stock picking approach. Investors can also hope that the near term blip on performance is hardly a pointer to long term, which in this case is at least a three year horizon.