A look at 8 tax-saving funds

By Morningstar Analysts |  07-02-19

Franklin India Taxshield

(click on the above to access the brief analyst note)

  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Fund Manager: Lakshmikanth Reddy, R Janakiraman

The investment process is research-intensive and relies heavily on a bottom-up approach. Portfolio managers and analysts jointly decide on the coverage list where they look for growth companies that fit their qualitative requirements.

Only companies that have durable competitive advantages versus peers, sustainable business models, strong entry barriers, able management teams, and good corporate governance standards are included in the coverage list. This is followed by quantitative analysis in which analysts gauge companies using a combination of DCF models and quantitative parameters relevant to the sector.

Analysts create sector-based model portfolios which are then combined by the research head to create market-cap-based portfolios. The fund managers use these model portfolios as the initial reference point. They invest in stocks they believe have good earnings growth potential. They are valuation-conscious and avoid areas of the market which are richly valued.

They would not shy away from investing in beaten-up growth stories and out-of-favour companies that face near-term headwinds but are fundamentally sound. The managers invest in stocks with a long-term horizon. Taking cash calls is not a part of the investment strategy.

The process is sound and workable over the long term and it has been executed with skill by the investment team so far.

The fund’s revised investment mandate provides managers the flexibility to construct the portfolio in a free-flowing manner without any bias towards a market segment or investment style. The strategy aims to have outcomes that on a quantifiable matrix have a superior risk matrix compared with either a peer midcap or a peer large-cap fund over a longer time frame. The exposure to a particular market segment (for example, large, mid, or small) in the portfolio is decided based on the stage of the economic cycle and relative valuations of stocks. Having said this, fund continues to have a large-cap bias in the portfolio despite the change in its strategy.

The fund also tends to be more concentrated in its high-conviction ideas compared with a typical peer. The managers do not shy away from taking contrarian calls. While the bottom-up approach is more prevalent, there is also a top-down overlay occasionally.

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