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Investing in the domestic cyclical theme worked for our tax fund: IDFC MF

IDFC Tax Advantage Fund has been one of the best performing schemes in its category. Fund manager Daylynn Pinto shares his investment strategies

May 05, 2021 / 02:45 PM IST

Daylynn Pinto is a senior member of a young equity fund management team at IDFC Mutual Fund. Pinto manages just two funds: IDFC Tax Advantage, from October 2016 and IDFC Sterling Value along with Anoop Bhaskar, also from the same year. The tax fund has done well. At 76.83 percent, it has been among the best performing tax-saving schemes over the past one year. Pinto talks to Moneycontrol’s Vatsala Kamat and explains his strategy.

The IDFC Tax Advantage Fund has topped the charts, beating the category over one and three-year timeframes. How has this outperformance come about?

The tax advantage fund primarily has a multi-cap approach. Large-caps have been in a broad range of 45 to 55 per cent, while the mid-and small-caps comprise the balance.

I think a part of the outperformance stems from the conviction about the investing approach, in spite of some adverse patches and pain for mid and small-caps in 2018-19 and a part of 2020. Persevering and being disciplined about the market capitalization allocation helped when the cycle turned.

Another reason for the fund's outperformance is playing the theme of domestic cyclicals. Most of the small-cap allocation was to cement, construction, building materials, consumer electrical goods and some part in metals. These will continue to surprise investors, on the back of government’s focus on infrastructure. Being overweight on the auto sector has also paid off handsomely. Given the decade of low growth, we are at the cusp of a multi-year cycle ahead, both from a revenue and margins perspective.

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Again, being underweight on financials (banks, insurance firms, non-banking finance companies) over the last 12-18 months has paid off, as this sector bore the brunt of COVID-led lockdowns and such issues.

How do you reduce risk in mid-and small-cap holdings? Tax funds have a three-year lock-in and investors tend to get anxious if the fund underperforms…

The combination and the way we approach our large and mid-cap holding is thought through.

Some risks gets mitigated partly by way of weightages. Our large-cap allocation has lesser number of stocks and they have larger weightages. Our small and mid-cap holdings have more stocks and less weightages to each of them.

This helps to address the issue of liquidity, which is a big problem with smaller companies. Lower weightages minimize risk. Therefore, you will find that the tail-end of the portfolio is a little longer in our portfolio, which has about sixty stocks.

Do you have a sell strategy for stocks, especially in current times when valuations may be expensive?  

Over the last 10 years, it has been most challenging to sell a winner. This is because stock prices have shot past the targets and gone even higher after they were sold. Valuations have looked stretched at times. That said, we usually adhere to weightages, especially in mid-cap stocks. We sell the stock and book profit if the weightage exceeds assigned levels.

How different is stock picking in a tax-saving scheme from that for other equity schemes?

The approach to a tax savings scheme’s portfolio construction is slightly different from that for other funds.

For one, money is locked in for three years. That gives me comfort to take slightly longer-term calls compared to other schemes. This helps me have a higher small-cap exposure, since there is less redemption pressure.

But the flip side is that investors look for a good return over a longer period. Of course, a longer-term period (say, three years) of merely holding and sticking with a certain philosophy does pay dividends, if you get the cycle right. In terms of choice of stocks in the portfolio, I look for some growth triggers in a company over the medium-term, which is typically 3-5 years.

Investors usually park money in tax-savings schemes in the last quarter of a financial year. Is this a right approach?

Absolutely not. I would advise investors to follow a systematic investment plan: divide the total amount that needs to be invested for tax benefit, through the year. Alternatively, if you find that the market has thrown an opportunity through a correction at any point in time, and you have the funds, invest right away.

What are the risks to domestic equity markets, hereon? Do you believe the second wave is getting out of hand?

The second wave becomes a large risk, if we are unable to vaccinate or if the vaccine does not work. But global data tells us that vaccines seem to be working. Again, some markets such as the UK reacted violently on news of the second wave, but recovered. One of the key reasons for market recovery is that governments continue to support industries and businesses.
Vatsala Kamat is a freelancer. Views are personal.
first published: May 5, 2021 11:47 am

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