Enduring gains

FUND PICK/Alliance Capital Tax Relief

Background: Alliance Capital Tax Relief is an open-ended, diversified tax-saving equity fund. Under Section 88 of the Income Tax Act investments of up to Rs 10,000 attract a 15-20 per cent rebate. Entry to the fund requires a minimum investment of Rs 500.

Performance: The fund is an example of the power of long-term returns from equity. If you had held the fund for the past five years you would have been showered with annualised returns of 43.80 per cent. Since launch nearly eight years ago, the fund's returns are an equally formidable 43.61 per cent annualised.

These returns are the result of strong performances in good years and holding on to those returns in bad years. Year 2000 was a good example of this when the fund fell just 0.55 per cent against a loss of 20.65 per cent by the Sensex.

In fact, its performance in that year appears to be magical. With half the portfolio in technology and a good portion in stocks that collapsed massively that year, holding on to returns was an amazing achievement.

In 2001 Alliance Capital Tax Relief's losses (down 21 per cent) were slightly worse than the category. Technology was always the fund's first love; it remained so even in 2002. Average technology exposure at 29 per cent was only slightly lower than the 33 per cent average in 2002. But what changed was the type of technology stocks.

Mid-caps such as Mastek, Hinduja TMT and MphasiS BFL replaced large-caps such as Satyam and Infosys. In other sectors, too, mid-cap exposure was increased. Thus the fund's banking exposure consisted of J&K Bank and PNB.

With 40 per cent of the portfolio in mid-caps, and most of these stocks registering significant gains, the fund was up 15 per cent. This was less than the average gain made by the fund category, though in line with the benchmark BSE 200.

The banking theme was further strengthened in 2003 with allocation to the sector increasing to an average 23 per cent from 13 per cent in the previous year.

Automobiles was another rich hunting ground with Bajaj Auto, Tata Motors and Maruti Udyog propelling returns. Other sectors like healthcare and energy also played a role in giving the fund the 100 per cent plus returns it scored in 2003.

Outlook: The fund has stayed in the category's second quartile in recent years. But the cumulative effect of its returns has been impressive. It can be considered a suitable equity-linked tax-saving vehicle.