Magnum Tax Gain - paid preview

While the fund's performance has been impressive, we would like to see it replicate the same over a longer time frame.
Is this fund for you?
Magnum Tax Gain (MTG), is one of the leading, open-ended tax funds in the country today. Launched more than 13 years ago, the fund took its time to announce its 'arrival' about 3 years ago. This came by way of a blistering performance, through a high risk mid cap investment strategy that propelled it to the top of its peer group.
While the fund's performance has been impressive, we believe there are two factors that go against the fund. First, it does not have much of a track record to speak of beyond 3 years despite being in existence since 1993. Second, all its growth has come in only in one rally (mid caps) and we have yet to see it perform during a market cycle (market upturn combined with a downturn). We believe that the investor's interests will be better served by investing in tax-saving funds with longer track records like HDFC Tax Saver, Franklin Tax Shield and HDFC Long Term Advantage.
Fund Outlook
MTG's high risk investment strategy is a double-edged sword. While it has reaped returns by pursing a concentrated mid cap strategy over the last 3 years, this could change very easily if the tide in that segment were to turn. Also SBI Mutual Fund's track record on identifying investment opportunities on the large cap side has not been as impressive. Equally significant is the recent change in the composition of the fund management team. Given that there is a new 'Head of Equity' at the helm, it is difficult to comment on whether MTG's superlative performance can be repeated with the same degree of success going forward.
Fund Profile
MTG is an open-ended tax-saving fund from SBI Mutual Fund (assets under management as on February 28, 2006 - Rs 131.9 bn). Launched in January 1993, the fund was pitchforked into the limelight only 3 years ago when a concentrated mid/small cap investment strategy turned its fortunes completely. Forgotten were the indifferent start and the patchy performance for most of its history. Where sheer performance goes, it is now a leading tax-saving fund. Over 1-Yr, its NAV has appreciated by 94.8%. Over 3-Yr and 5-Yr, it has appreciated by 100.0% CAGR and 35.7% CAGR respectively.
Fund Manager
Mr. Gopal Agarwal is fund manager (equity) at SBI Mutual Fund. He manages Magnum Tax Gain, Magnum COMMA Fund and Magnum Midcap Fund among other funds. He took charge of Magnum Tax Gain after Mr. Sandip Sabharwal quit SBI Mutual Fund in October 2005.

MTG's performance over 1-Yr (94.8%) is impressive on two counts. First, in absolute terms it has nearly doubled the investor's investment in just 12 months. Second is in sheer outperformance of peers; HDFC Tax Saver (71.1%) is a distant second. Admittedly, a shorter time frame of 1-Yr is not an ideal period to evaluate an equity-linked fund, least of all a tax-saving fund with a mandatory 3-Yr lock-in.

MTG's performance over the longer time frames of 3-Yr and 5-Yr is mixed. Over 3-Yr, it stands head and shoulders over competition with an outstanding 100.0% CAGR. Again, the pace of its performance is too scorching for its peers; its nearest competitor is PruICICI Tax Plan (83.6% CAGR). However, its impressive show is blemished by the 5-Yr track record (35.7% CAGR). It is the penultimate fund in its peer group over this time frame. PruICICI Tax Plan (44.9% CAGR) and HDFC Tax Saver (43.9% CAGR) fare better than it. As we have mentioned earlier, MTG's relatively superior performance over the shorter time frames of 1-Yr and 3-Yr is due to a high risk investment strategy of targeting mid/small caps.

Volatility
MTG's performance on volatility parameter (Standard Deviation 6.23%) could have been better when you look at what its peers have achieved. All its peers save PruICICI Tax Plan (6.80%) have done better at restraining volatility in performance. Birla Equity Plan (5.62%) impresses the most on this count.

Risk-adjusted return
In terms of generating a risk-adjusted return, (Sharpe Ratio 0.76%), MTG is way ahead of its peers. HDFC Tax Saver (0.64%) is a distance second, followed by PruICICI Tax Plan (0.61%). This implies that MTG has done a far better job than its peers in rewarding investors per unit of risk taken

Portfolio Strategy

MTG's investment style is opportunistic and it invests heavily in trends. For quite some time now, the fund, like a lot of other equity-oriented funds from SBI Mutual Fund, has had a strong mid cap bias. This has paid handsome dividends as its performance indicates. In terms of stock selection, it is relatively consistent in its stock picks.

As on January 31, 2006, the fund had 89.7% of its assets in equities with cash/current assets accounting for the balance 10.3%. In recent times, MTG has maintained a high cash component. This could be due to profit-booking in view of the forthcoming dividend declaration.

In terms of diversification, the top 10 stocks in MTG's portfolio accounted for 42.3% of net assets. This makes the fund relatively well-diversified, given our view that a diversified equity fund must have no more than 40% of its assets in the top 10 stocks to counter volatility from stock market turbulence. To that end, the most diversified fund is Franklin India Tax Shield (37.3%). HDFC Tax Saver 49.4% is the most concentrated fund.



Sectoral Allocation


MTG's sectoral allocation across its 5 leading sectors compares well with that of its peers. With 56.0% of net assets in 5 sectors, the fund is the second most diversified fund in the peer group; Birla Equity Plan (55.0%) is the most diversified. HDFC Tax Saver (68.0%) is the most concentrated fund.

For calculation of sectoral allocation, similar-natured sectors have been combined; for example in MTG's case, Industrial Capital Goods and Industrial Products have been combined under Engineering.



Objective Vs Actual

The prime objective of the fund is "to deliver the benefit of investment in a portfolio of equity shares while offering tax rebate on such investments". "It also seeks to distribute income periodically depending on distributable surplus."

Since distributing surplus by way of dividends is a function of the capital appreciation generated by the fund, it is important understand if the fund has performed on that front. With 100.0% CAGR and 35.7% CAGR over 3-Yr and 5-Yr respectively, it is reasonable to conclude that the fund has generated wealth for investors.

In terms of distributing surplus, the fund has declared dividends regularly over the years.



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Definitions

Expense ratio is the expenses of the fund including the management fee, administrative costs divided by the net assets of the fund under management. A lower expense ratio indicates a more cost efficient fund.

Sharpe Ratio is a measure developed to calculate risk-adjusted returns. The Sharpe Ratio is the difference between the annualised return (Ri) and the risk-free return (Rf) divided by the Standard Deviation (SD) during the specified period. Sharpe Ratio = (Ri-Rf)/SD Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.

Standard Deviation (SD) tells us how much the values have deviated from the mean of the values. SD measures by how much the investor could diverge from the mean return either upwards or downwards. It highlights the element of risk associated with the fund. The SD is calculated by using returns of the scheme i.e. Net Asset Value (NAV). Higher the SD, higher the element of risk (volatility) in a scheme.