A look at 8 tax-saving funds

By Morningstar Analysts |  07-02-19

SBI Magnum Taxgain Scheme

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

  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Fund Manager: Dinesh Balachandran

Dinesh Balachandran took over the reins of this fund in September 2016, when its erstwhile manager of almost nine years, Jayesh Shroff, exited the fund company.

The manager change has not had an impact on the fund’s broader framework; it continues to be a predominantly large-cap offering. However, Dinesh Balachandran’s investment style is different from Jayesh Shroff’s. For instance, Shroff used to invest in growth-oriented stocks that are leaders in their respective sectors. Balachandran, on the other hand, focusses extensively on valuations. He is flexible with his stock picks, and won’t shy away from investing in a company that is not best in class but has a good risk-reward prospect. He prefers stocks that display change in margin, have a margin of safety, and possess good earnings prospects, but he avoids highly leveraged businesses.

Stocks are selected using both top-down and bottom-up approaches, with the latter more prominent. Balachandran considers the macro scenario while taking sector/thematic bets, but the benchmark alignment has made this aspect of the strategy less relevant. While benchmark alignment can theoretically reduce the risk of relative underperformance, the valuation-conscious approach will result in the fund struggling in sharply rising or momentum-driven markets.

In our opinion, the investment approach is common enough, and its execution will play a key role in determining the fund’s long-term success. We would like to observe and evaluate the process over the long haul before building confidence in it.

Dinesh Balachandran restructured the portfolio after taking over to align it with his value style of investing. This resulted in the exit of various growth-oriented, richly priced, and high beta stocks. The fund’s structure requires the manager to ply a benchmark-conscious strategy while constructing the portfolio’s sector weightings.

The stated deviation range is plus or minus 8 percentage points vis-à-vis the benchmark’s (S&P BSE 100 Index) sector weightings. Also, if a stock accounts for at least a 5% weighting in the index, the manager would typically include it in the portfolio to adhere to the professed benchmark alignment.

Balachandran believes his style necessitates investing for the long haul and hence he invests with a three- to five-year horizon. He is willing to endure short-term pain for long-term gains.

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