Save tax with Fidelity

To generate long term capital growth from a diversified portfolio of predominantly equity and equity-related securities.*
*Source: Offer document

Tax planning finally got the attention it deserved when the restrictive Section 88 gave way to the 'free-flowing' Section 80C. Under the revised tax regime, investors now have the option to invest in line with their risk appetite, which is how tax-planning should be done. Moreover, Section 80C is more pervasive, it applies to all investors regardless of the tax brackets (Section 88 benefit was not applicable to investors with gross total income in excess of Rs 500,000).

Of particular interest to the risk-taking investor is the flexibility to invest a lot more in tax-saving funds (ELSS) than the puny Rs 10,000 earlier. Under Section 80C the limit stands revised at Rs 100,000. This means that aggressive investors can allocate a larger share of tax-saving monies to such funds.

In order to appreciate whether Fidelity Tax Advantage Fund (FTAF) is a fit in your tax-saving portfolio, it is important to first consider a few points. Fidelity Fund Management Private Ltd. (the Asset Management Company) launched its first scheme (Fidelity Equity Fund) in March 2005.

Although the asset management company (AMC) is yet to complete a year, it has had exposure to the domestic stock market for over 10 years by virtue of its presence as a FII in India. Over the 9 months since inception Fidelity Equity Fund has performed reasonably well vis-à-vis peers. Although, a 9-month time frame is not sufficient to gauge the performance of an equity fund, we would nonetheless like to draw the investor's attention towards the fund's well-diversified investment strategy and process-driven approach.

An interesting feature about the NFO is that the AMC will absorb all the initial issue expenses; it will not pass on the cost to the investor, which is the standard industry practice. The same will reflect in the investor's return.

Given Fidelity Mutual Fund's well-defined processes, we recommend that investors consider allocating a portion of their ELSS investments to FTAF. Also since most investors already own equity/tax-saving funds from other AMCs, investing in FTAF will allow them to diversify across a new AMC and benefit from its investment strategy and processes.

FTAF's investment style is unlikely to be very different from Fidelity Equity Fund. The fund manager will invest across large cap, mid caps, small caps, sectors and themes. It will combine the value and growth styles of investing. In other words, it will adopt an inclusive investment strategy. In terms of stocks, its portfolio will have about 60-80 stocks with no single stock likely to account for more than 4% of net assets.

In our outlook for Fidelity Equity Fund we had mentioned that the fund's processes and a well-diversified investment portfolio would be its biggest allies in generating a return at lower volatility. We feel the need to revisit this since FTAF will be managed in a manner similar to Fidelity Equity Fund.

Moreover, we also have the benefit of hindsight as far as Fidelity Equity Fund is concerned. Fidelity Equity Fund's stock portfolio is well-diversified with 32.1% of net assets invested in the top 10 stocks as on September 30, 2005; in all it had 103 stocks in its portfolio. In our view, a diversified equity fund should have no more than 40% of its assets in the top 10 stocks and Fidelity Equity Fund fares well on that front.

Since FTAF will be managed in a comparable style, investors can expect similar performance traits viz. consistency in performance across market cycles at lower volatility. If anything, investors can probably expect more consistency, since FTAF will be managed with a 3-Yr lock-in giving the fund manager the flexibility to make long- term investment calls.

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