US-64: Think long term or haul out

Mumbai: 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.

While 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 steady.

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 2003.

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 something different.

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 price).

Above 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 companies.

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 ratio.