Unit Trust of India's
flagship scheme US-64 has been caught up in controversy
for over three years now since the first problems cropped
up in 1998, when the Centre had to announce a bailout package.
Since then various committees Deepak Parekh, Malegam and
Tarapore made various suggestions and recommendations
to improve the functioning of the Unit Trust of India (UTI)
as a whole.
most recommendations went unheeded till a fresh crisis occurred
in June 2001, some of them are finally in the pipeline of
implementation. It is here that investors, now twice-bitten,
have to understand the intricacies of investing in UTI schemes
US-64 in particular for their own benefit. Let us understand
the US-64 scheme as a whole and deduce the investment and
return mileage one can get in the current situation.
After 37 years, US-64 has now clearly stated its asset allocation.
It will own both stocks and bonds, maintaining a balance
between the two asset classes. Usually it will place about
75 per cent of its assets in bonds and 25 per cent in stocks.
Now, US-64 could be a lower-risk investment and a simple
way to get some equity exposure.
Simply put, it may be suited if you want to invest without
assuming too much risk and also want to make money. Hence
US-64 will be a steadier vehicle to own equities for a long
term. But your regular income expectations may not materialise
from US-64. Also, given its conservative stance in equities,
US-64 cannot provide a very high return.
Bonds play a defensive role. And US-64 will devote 75 per
cent of its portfolio to bonds, which means a large part
of your investment will be reasonably protected. And since
typically balanced funds periodically rebalance between
stocks and bonds, the percentage protected should stay pretty
The remaining 25 per cent allocation to stocks will provide
further growth. Notwithstanding the recent disappointment,
stocks prove rewarding over a long term as the growth of
nations seems a long-term certainty. But you will still
be exposed to the market risk the risk of fluctuating
markets. Over the short term, it is a serious risk.
US-64 has been opened for continuous sale and redemption
again from 1 January 2002 based on its daily NAV. At any
point of time the sale price will not exceed NAV plus 3
per cent of NAV. And the minimum redemption price will be
97 per cent of NAV for redemption within one year from the
date of investment at 98 per cent for redemption within
one to two years; at 99 per cent of the NAV for redemption
between two to three years; at NAV after three years.
The special offer
The pricing of the fund has become a fairly complicated
for all its existing investors. UTI will provide a guaranteed
repurchase price for the first 5,000 units of all unit-holding
accounts. The guaranteed repurchase price is Rs 10.50 for
the month of January 2002 and will go up by 10 paisa every
month till May 2003, barring the month of June 2002.
Hence, the repurchase price will be Rs 11 in July 2002 and
Rs 12 in May 2003. For the remaining units, the redemption
will be at the NAV-based price between 1 January 2001 and
31 May 2003. However, investors have been offered higher
of the minimum repurchase price of Rs 10 or NAV on 31 May
The action plan
First and foremost, your decision to stay put or exit US-64
should be based on its suitability for your financial goals
and return expectations. US-64 is not suitable for investors
who seek a regular income or high growth from their investments.
And if you decide to exit the fund for its unsuitability,
you should still evaluate the special offer provisions before
redeeming your units, as getting out now may not be opportune.
The decision to exit is simple for investors owning up to
5,000 units. Such investors seeking regular income from
their investments can stay put till May 2003. For them,
US-64 is almost like a fixed income investment without any
downside, given the guaranteed repurchase price. But you
must redeem your units in May 2003 and invest your redemption
proceeds in a fixed income fund. And if you own 5,000 or
fewer units and want growth, you should exit now and invest
the redemption proceeds in a diversified equity fund.
If you own over 5,000 units and seek a regular income or
high growth from your investments, the fund may not be suited.
But your decision to sell will depend on the state of NAV.
If NAV is lower than Rs 8, then you should stay invested
till May 2003 as UTI assures a minimum repurchase price
of Rs 10 to all the units you own. But you should also track
NAV and redeem if it attains a level close to Rs 10 in the
interim before May 3003.
US-64 will be suited only for long-term investors who want
to invest without too many risks and also want to make money.
And even as a long-term investor, you must periodically
review its heath and relative performance to continue with
the fund. There is also an opportunity of arbitrage opportunities
for small investors in US-64. More often you would have
heard of arbitrage opportunities in stocks, but that is
To leverage and gain, the investor should sell the units
to the fund at the administered price of Rs 10.50 in January,
and buy fresh units at a lower NAV price. By doing this
the investors makes a net profit of more than Rs 4 at the
current NAV-linked price of roughly Rs 6 per unit. The investment
gets an immediate appreciation of 72.4 per cent as they
maintain their corpus of units. Apart from that, the
investor can claim a capital loss while filing returns (because
you are selling units at a lower price than the purchase
all, the chances of appreciation in the unit value of US-64
are high because the fund has invested 85 per cent of the
total corpus in AAA-rated debt instruments and fundamentally-strong
Thus, investors should first chart their holding and reinvesting
capacities and take a decision accordingly to avoid further
erosion in value of their holdings and optimise the risk-return