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Long-term Performer

Though it has been one of the most volatile funds in the recent past, it has rewarded its investors quite well. You may invest in this fund to add a lot of mid-cap flavour to your portfolio

This fund invests heavily in mid- and small-cap stocks to capitalise on their huge upside potential. So far, the fund has done a good job as the market has favoured smaller companies. The fund has been volatile, but that isn't a very big issue in a fund where investments are locked in for three years.

Performance
Taxplan did not have a good beginning. After its launch, it lost close to 35 per cent, almost twice the category average during the quarter ended June 2000. Like many other funds, Prudential ICICI Tax Plan saw its returns evaporate in the tech meltdown. 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.

In 2002, the fund under-performed the category, as it had a low exposure to mid-caps, which did better than large-caps. Since then, the fund has found great affinity with mid- and small-caps, which has worked well. It provided category beating returns of 36.46 and 150 per cent in 2004 and 2003, respectively. Even in 2005, it has delivered year-to-date returns of almost 50 per cent.

But the road to achieving category beating returns has been bumpy. The first quarter of 2004 proved disappointing, when the stock market 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. 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.

Portfolio
Generating returns by investing in smaller companies has been hallmark of this fund. The fund manager has displayed the ability to pick opportunities among lesser-known stocks early enough to earn handsome returns out of them. But the fund tries to mitigate the risk of investing in small-caps by keeping the portfolio well-diversified across sectors.

However, the fund at times takes concentrated bets in a few stocks. For example, fund's exposure to Aban Loyd Chiles Offshore averaged 9 per cent between June 2004 and June 2005. Aban Loyd has been in its top five holdings since December 2003, and has surged more than 250 per cent since then. KPIT Cummins, BOC India, Rane Engine Valves and Suryalakshmi Cotton Mills have been some other good bets.

At the sector level, the fund has exited metal stocks. The allocation to energy stocks has also gone down significantly, while the fund manager seems to be quite bullish upon sectors like construction and health care. The fund judiciously balances its long-term investments and moving out of some stocks just in a few months.

Outlook
Though Prudential ICICI Tax Plan has been one of the most volatile funds in the recent past, it has rewarded its investors quite well. So far, the stock-picking has been impressive. Invest in this fund to add a lot of mid-cap flavour to your portfolio, but be prepared to digest the ups and downs, which may come your way.