One is consistent, the other average

FUND ANALYSIS

It takes all types to make the world and all sorts of investors to comprise the investment universe. So despite, equity-linked savings schemes (ELSS) being a lucrative tax saving option, there are many who prefer to keep a distance from them.

These are the type of investors who would naturally gravitate towards five-year bank deposits or National Savings Certificate (NSC) to save taxes.

Well, we have another option that these risk-averse investors can explore "� debt-oriented tax saving funds. All along we have spoken about equity oriented tax saving funds.

Here are some options targeting investors with a different risk appetite.

Debt-oriented tax saving funds are low on risk due to the high debt component. These are ideal tax saving instruments for investors seeking enhanced return with stability over the long term.

The choice is not as great as the equity option. Here we have just two schemes on offer "�Templeton India Pension Plan and UTI Retirement Benefit Pension Fund. Investments in both qualify for a deduction under Section 80C of the Income Tax Act. And, like any ELSS, they have a three year lock-in period.

TEMPLETON INDIA PENSION PLAN
The Templeton India Pension Plan (TIPP) is a four-star rated, debt-oriented fund which currently manages assets close to Rs 177.69 crore (as on January 31, 2008).

Launched in March 1997, it had no equity exposure in the initial years but remained a debt fund. It was only from May 2000 that the fund slowly began to add the equity component. The average equity exposure over the years stands at around 40 per cent.

This is well within the fund's mandate which requires it to restrict its equity exposure to a maximum of 40 per cent of the portfolio. Even within this equity exposure, the fund is well-diversified between 25-30 stocks with a strong large-cap bias.

On the debt side, the average maturity of the portfolio has been rising steadily. From 4.93 years (January 2007) it is now close to 21 years (January 2008). This is a clear indication that the managers are of the belief that the interest rates have peaked and would not rise further.

The credit rating of the portfolio has been managed with great care. Barring a few months when it slipped to AA, its average rating over the past few years has stayed at the AAA level. As per the January portfolio, 38 per cent of the assets are invested in Government of India (GOI) Securities.

The numbers are testimony to the fact that the three fund managers have been doing a fairly good job. The fund has delivered an annual return compounded annual growth rate (CAGR) of 16.28 per cent in its decade long history (as on February 11, 2008).

Barring 1999 and 2002, the fund has managed to beat the category average year after year. The downside too has been protected well. The worst period for the fund was September 2000-01, when the fund lost just 3.45 per cent.

UTI RETIREMENT BENEFIT PENSION FUND
The UTI Retirement Benefit Pension Fund (RBPF) has an identical mandate as its Templeton counterpart. A noticeable difference is that it manages more assets "� Rs 523.78 crore as on January 31, 2008 "� and has a lower rating of three stars.

On the equity side, the fund is less aggressive than TIPP. It has maintained an average equity exposure of just 28.4 per cent since January 2006. A significantly lower percentage when compared to Templeton's 38 per cent during the same period.

Despite the lower equity allocation, the number of stocks invested in is higher "� at 30-34 on an average. Like TIPP, this scheme too has a large-cap bias.

On the debt front, the fund has maintained a relatively low average portfolio maturity. Though it has always been below five years in its entire history, it averaged at just 3.05 years in the January 2008 portfolio.

The fixed income portfolio has not been actively managed and the average portfolio maturity has virtually remained static in the recent years. The credit rating of the portfolio, maintained at AAA since August 2004, slipped to AA in January 2008.

Compared to TIPP, the fund does not invest much in GOI Securities, just 5 per cent to be precise. While 45 per cent of the fixed return investments are in the form of non-convertible debentures.

An average performer since launch in 1994, for many years it struggled to even match up to the category average. Its five year returns of 16.71 per cent per annum are just marginally ahead of the category average (as on February 11, 2008). Yet, when bad times hit, the fund has slumped. Its worst performance was in November 2000-01 when it suffered heavy losses of almost 19 per cent.

MAKING A CHOICE
Though less risky than equity funds, these two schemes are not totally risk free. The equity component does expose them to some amount of market risk while the debt component will have the interest rate risk and the credit risk. But in the long run, these funds should manage to beat the returns offered by the other secured tax saving instruments. And that would mean good news for the investors.

Source: Valueresearch