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Don't exit UTI's US-64 now, say analysts

Small investors should not exit the Unit Trust of India's beleaguered US-64 fund for the next two years since it offers a better guaranteed rate of return than fixed income instruments, analysts said.

On Sunday, the country's largest fund manager unveiled a relief plan allowing limited redemptions in its flagship fund starting from August, in an effort to ease the impact on small investors of its earlier decision to suspend repurchase for the rest of the year.

"Investors should stay put in US-64 now that returns are guaranteed at 12 per cent for the next two years," said Dhirendra Kumar, managing director of fund tracking firm Value Research.

"There will be a yearly dividend payout, and any remarkable turnaround in the market will translate into superior returns."

UTI announced on Sunday that from August 1 to May 31, 2003, it would allow all investors to redeem up to 3,000 units each.

For those units, the repurchase price would be the higher of either the net asset value of the fund at the time of redemption or the specified price for that month.

The minimum guaranteed price begins at Rs 10 per unit for August, and increases by 10 paise per month to a maximum of Rs 12 in May 2003.

"Returns are better than fixed income options," said Sanjay Dutt, director at Quantum Securities. "There is no point exiting because the downside is capped, and there is a one per cent appreciation each month."

The net asset value of a fund is the market value per unit of the investment portfolio that it owns.

From next January, US-64 will be reopened to new subscriptions and unlimited redemptions. The repurchase price for all units acquired after that date, and for units purchased in the past in excess of the 3,000-unit limit of the special offer, will be redeemed at the fund's prevailing NAV.

MOLLIFYING INVESTORS

UTI's relief plan is meant to mollify the approximately 20 million investors in US-64.

The fund manager imposed the freeze following a surge in withdrawals from US-64 in recent months, triggered by concerns UTI would cut the dividend and slash the repurchase price as a result of a stock market decline that began in March.

On July 2, UTI did cut its dividend -- to 10 per cent from 13.25 per cent.

Since its inception, US-64, which accounts for a fifth of UTI's assets, has never been required to announce its net asset value. The repurchase price was set on a monthly basis by UTI, by means never made clear to the market.

In May, UTI redeemed units in US-64 at Rs 14.24. Investors redeeming shares in August will receive 30 per cent less.

Some 41 million people have invested money through UTI's 87 different funds, which together have Rs 575 billion in assets, about two-thirds of the total assets of the Indian mutual fund industry.

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