Your UTI Strategy

Last July, UTI shocked millions of investors when it froze redemptions in US-64. The crisis was postponed by a government bailout, but is fa...

Last July, UTI shocked millions of investors when it froze redemptions in US-64. The crisis was postponed by a government bailout, but is far from over. The big fiduciary will remain under constant pressure, as its guaranteed income closed-end MIPs will fall due for redemption every three months for net few years. US-64 will finally feel the heat in May 2003, the day when all investors in the fund can get the best out of a bad investment. Here’s an action plan for your investment in UTI.

US-64: For investors with 5,000 units or less, it makes sense to stay put in the fund because of the assured repurchase price. You can sell only 5,000 units back to UTI at Rs 10.80 now. This goes up by 10 paise every month, till it reaches Rs 12 in May 2003. If your holding is above 5,000 units, it’s still worth holding on as these units will be redeemed at an assured price of Rs 10 in May 2003. But don’t sleep! If the NAV crosses Rs 10 before this date, get out. But this is unlikely for the fund would need to generate a whopping 48 per cent annualised return from the current level of Rs 6.35 to reach its par value. As for new investors, keep out. Even at Rs 6.35, the fund’s not cheap. More so, since it will face massive redemption in May 2003, and will remain volatile.

UTI MIPs: Monthly Income Plans guarantee regular income. The MIPs launched during the period of 1995-1998 gave assurance for all the five years. UTI paid dividends in these MIPs by dipping into its capital. Only a big surge in equities can rescue these funds, and most are beyond recovery. The NAV of the dividend option of MIP 1997(I), due for redemption in April 2002, is Rs 6.08. And the legitimate investor expectation should be a redemption value of Rs 10. While some MIPs launched in 1997 and 1998 assured a return of 13-14 per cent, the sharp fall in interest rates has only added to their woes. Besides the falling rates, the mounting bad debt with a deteriorating economy and inefficient businesses has compounded the problem. Most MIPs will be out of pocket on their redemption. But most MIPs guarantee your capital, that is, the face value, on their redemption. You have no choice but to stay a put till redemption of the fund. Exiting now doesn’t make sense as the NAV realised will be less than the face value. The worst case scenario will be a little anxiety and another bailout from the government.

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Equity Funds: The hottest open-end equity funds of last decade styled as Master —Mastergain, Masterplus, Mastergrowth, Grandmaster, PEF, UTI Index Select Equity, UTI Master Index, UTI Nifty Index. The closed-end lineup include the eight funds of Master Equity Plan series and the listed Mastershare, Unit Scheme ’92, UTI Master Value Unit Plan.

All these open-end equity funds are plagued by identical problems, most of these were launched as closed-end fund and converted into an open-end fund before redemption. Majority are large equity funds. And the portfolio of all looks wildly diversified. These eventually translate into a reasonable component of the corpus and prove a drag on the net asset value. The impact is especially visible during a surging market, when a part of the portfolio (especially illiquid stocks) cannot contribute to the rising NAV. On the other hand, illiquid holdings can put an open-end fund in jeopardy in the event of a sizeable redemption. All this has meant a long track record of below-average performance.

The only way out is an early exit. One does not where these funds are headed in the absence of articulate strategy statement. Similar is the case of the closed-end Master Equity Plan series. One will be better off elsewhere. And being open-end or being open repurchase makes it easier. The only one holding on to, because it’s due for redemption in October 2003, is Mastershare. And you will realise the NAV. If you exit now, it trades at a steep discount to NAV in the market.

The author is the chief executive of ValueResearch, which tracks mutual funds. He can be reached at dhiren@valueresearchindia.com