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Smart But Volatile

For investors, volatility remains an issue here but it could even out over three years. This fund deserves a second look

Though Prudential ICICI Tax Plan has been one of the most volatile funds in the recent past, it has rewarded its investors quite well. It provided a category beating return of 36.46 and 150 per cent in 2004 and 2003, respectively.

Interestingly, a small-cap dominated portfolio backed by a good exposure to mid-cap stocks did the trick for the fund in 2004 as it maintained an average 88 per cent exposure to these two types of stocks in 2004 with small-caps touching a high of 66 per cent. The strategy proved disappointing in the first quarter when the stock markets turned on its tail, and the fund lost a whopping 18.36 per cent against the 5.44 per cent loss of its average peer. But the fund persisted with a small-cap dominated portfolio and survived the May mayhem, losing just 3.23 per cent in the second quarter, while the category was down over 9 per cent. The fund ended 2004 as the sixth best performer of the category.

Prudential ICICI Tax Plan has been extremely lucky with its stock selection. Smart picks like Aban Loyd, Blue Dart, BOC India, KPIT Cummins and Hindustan Zinc have rewarded the fund handsomely. Aban Loyd has been in its top five holdings since December 2003, and has surged 130 per cent since then. Similarly, a high exposure to KPIT Cummins in 2004 has resulted into superlative gains for the fund as the stock price doubled in 2004.

Even in 2003, the fund had smart pickings in mid-caps with stocks like Eicher Motors, Rane Engine and Ucal Fuel Systems being major gainers. Bank stocks also helped in the fund's performance. In 2002, the fund under-performed the category, as it had a low mid-caps exposure, which did better than large-caps. But the fund did exceptionally well in minimising losses in 2001; it just lost 6 per cent against the category declining by 20 per cent. Reason: its dominant allocation to defensives like fast moving consumer goods and healthcare stocks.

The fund manager takes long-term calls and bets on small- and mid-caps, which provide better returns than large-caps, although the risk is higher. So far, the stock-picking has been impressive. For investors, volatility remains an issue but it could even out over three years. This fund deserves a second look.