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SBI Magnum Tax Gain
(Save Tax with High Returns)

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Magnum Taxgain has consistently yielded superior returns over the past couple of years. The fund has capitalized on the bullish trend in the markets in 2003 and 2004; its shift to mid-cap stocks has also paid rich rewards. The scheme has generated 13.8% annualized return since it turned open-ended in November 1999 against 9.2% annualized return by its benchmark, BSE 100 over the same period. Head of Equity at SBI Mutual Fund and Fund Manager for the scheme Sandip Sabharwal attributes this performance to the superior stock selection with a long-term view on investments.

However, the scheme's performance had suffered severe setback through 2000 after being one of the top performers in 1999. It not only under-performed the broad market indices, but also the majority of tax-saving schemes from other mutual funds. On this, Sabharwal says, “The scheme suffered in the relevant period due to an overexposure into the TMT segments. However subsequent to the poor performance during that period significant and substantive risk management practices have been put into place and now we operate with stock specific as well as industry specific limits. However except for that two year period the scheme has done very well and we expect to continue to outperform going forward.”

 

Experts believe that the scheme will become even more attractive now with the Finance Minister's budget proposal to remove the cap on investment in tax saving instruments, allowing an investment of Rs 1 lakh in equity linked saving schemes, ELSS. Sabharwal says, “We believe this will be a big driver for flows into the equity markets. Earlier the cap was at Rs 10000, so it really did not make sense for a lot of people to invest this small amount and then monitor the performance. However with Rs 1 lakh limit, we are likely to see huge inflows into this category of schemes from April 1st onwards.”

 

Commenting on the advantages of investing in ELSS, Sabharwal says, “If you see ELSS schemes across fund houses they are one of the best performing schemes mainly due to stable long-term funds where the fund manager can also take a long-term view. The other advantages of no long term capital gains tax and tax free dividends also is a big positive as all the returns that an investor makes out of this scheme are free of tax which is not so for most asset classes today.”

 

Meanwhile, the government is mulling over the proposal to tax the maturity value of the tax saving instruments. When asked about the impact of the same on the scheme, Sabharwal said, “The Finance Minister has proposed the EET scheme but it is yet to be implemented. Even if it gets implemented it will be uniform across tax saving asset classes and as such will not have a significant impact on the inflows.”

Table I
Date Div (Rs/unit)
Mar 1995
Dec 1999
Sep 2003
Dec 2003
Mar 2004
Oct 2004

0.80
2.50
1.50
1.50
1.50
2.70

The fund’s NAV touched a 52-week high of Rs 39.86 on March 4, 2005 and has since declined by 6.5% to Rs 37.26 on March 28, 2005. The scheme has till date paid out six dividends (refer Table I for dividend history).

The scheme’s absolute return across various time periods compared with the return on the BSE 100 for the same period are as given in Table II and Table III gives the value (as on March 28, 2005) of Rs 10,000 invested in the scheme at different periods of time.

 

 
Table II

Period

BSE-100

Abs. Returns

Inception

241.2%

443.1%

Since turned open-ended

60.9%

100.7%

5 years

13.5%

-8.2%

3 years

103.0%

286.0%

2 years

126.9%

360.5%

1 year

18.4%

86.5%

6 mths

17.3%

50.7%

3 mths

-2.1%

14.3%

BACKGROUND

SBI Mutual Fund launched the Magnum Taxgain in April 1993 as a close-ended scheme and was later converted into an open-ended fund from November 1999. It is an Equity Linked Savings Scheme, ELSS, which aims to provide medium to long-term growth of capital along with income tax rebate. Currently, investment of upto Rs 10,000 annually in this fund entails a tax rebate under Section 88 (2) (xiii b) and carries a three-year lock-in period.

Entry into the fund requires a minimum investment of Rs 500. The entry load is 2.25% and exit load is nil. Securities Transaction Tax of 0.15% is applicable at the time of repurchase irrespective of the amount of investment ad date of investment.

Table III
Period

Invested on

Value

Inception

31-Mar-93 Rs54,315

Since turned open-ended

10-Nov-99

Rs20,066

5 years

29-Mar-00

Rs9,178

3 years

28-Mar-02

Rs38,599

2 years

28-Mar-03

Rs46,051

1 year

29-Mar-04

Rs18,651

6 mths

29-Sep-04

Rs15,073

3 mths

29-Dec-04

Rs11,433

PORTFOLIO ANALYSIS

Magnum Taxgain Scheme has portfolio largely invested in mid-cap stocks. Barring Gujarat Ambuja Cement, it has weeded out even the few large-cap stocks that it held last year. The scheme invests with a bottom up approach with certain sectoral caps. Its current turnover ratio is close to 110%, says the fund manager.

The scheme's strategy to stick with quite a few of its midcap stocks in the top ten holdings — Thermax, Praj, Crompton, KPIT, Sintex, and United Phosphorus  — for several months now, has paid off.

Besides this, Magnum Taxgain is heavily skewed to Electrical Equipment stocks which together account for almost 32% of the net assets. Sabharwal says, “Actually the companies into which we have invested in belong to different product classes and each is different in its product profile. We are positive on this sector due to the strong capital investment cycle which has started in the economy and also due to bright export prospects.”

The scheme completely off-loaded its investments in the auto, services and utility sector over the last four months, while hiked its exposure to the construction and engineering sector. Over the last three months, the scheme’s stocks list remained almost unchanged except for the introduction of Bharati Shipyard in December 2004 and exiting Blue Dart Express, and Jubilant Organosys.

Magnum Global Fund’s AUM has soared by 34% over the last six months to Rs 75.16 crore in February 2005.

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