US-64 restructuring shaping up well -- Mr. P. S. Subramanyam, Chairman, UTI

Rajesh Chandramouli

The Unit Trust of India has managed to shape up its flagship fund, US-64, than it was in two years ago. How does it view the future? The UTI Chairman, Mr. P. S. Subramanyam, spoke to Business Line on the various issues, in particular those relating to US-64. In this first of the two-part interview, we carry edited-excerpts on his views on US-64. The second part of the interview will be published on September 10.

Excerpts from the interview:

Are you satisfied with the way the US-64 scheme has shaped up? Do you think the crisis is really over?

We have done quite well in reshaping the US-64. The portfolio today is strong and healthy. We have a mix of both New and Old Economy stocks. There are two requirements which are still not met. One is to put the sale price and purchase price based on NAV, for which a three-year time frame has been given. If it is done in one year, it might affect the market. So the Deepak Parekh Committee suggested that we should do it gradually. And we are also in line with that.

The second requirement that is not fulfilled is with regard to the constitution of an Asset Management Company (AMC). The Committee said a separate AMC should be formed for US-64. This would mean breaking the UTI into two; this has to be examined by Parliament. This would require amendments to the UTI Act, and also raises a plethora of questions about the UTI structure. It is not easily solvable. The Government and Parliament will have to take decisions.

Could your emphasis on collecting more funds prove to be a problem some years down the line? This is what happened in the massive fund mobilisation phase in the mid-1990s.

I do not think so. During the mid-1990s, it happened mainly because of certain elements, such as corporates, coming into the picture. As of now, we have a mixture of both corporate and retail subscribers. Retail subscribers are more in number. So more mobilisation will not come in the way of handling the portfolio.

Is your fund mobilisation aimed at reducing the gap between the NAV and sale/repurchases price by using the unit premium?

It is not so. Any mutual fund has to mobilise more funds. Just because we have achieved a certain size, everyone is saying that the UTI has achieved too large a size and, therefore, it should be broken up. And what is our size? Please compare our size with that of mutual funds in the US. Our size is around $16 billions. It is not too huge a size. I do not know why other funds are complaining about it. We should be growing. What we need is to enlarge the pool of savings. Let us all work together to achieve that objective.

Do you genuinely believe that US-64 could keep paying out close to Rs. 2,300 crores as dividend, year after year? Last year, you may have benefited from the bull run. This may not happen every year...

It is an art of fund management. When the market fluctuates, we also need to shuffle our portfolios in such a manner that we deliver a fair return to the investor. What I had mentioned even at the time we reshaped US-64 was that our return under US-64 will be market-oriented. Whereas in the past, the returns were given in absolute terms without having any relationship with the market's rate of return. I will continue to maintain that we will be in a position to provide the market rate of return.

Do you have a problem as a late entrant to the IT party, having picked up stocks at high prices?

Certainly not. We entered at the right time and we booked profits at the right time. We have also consciously undertaken an exercise to see that our portfolio, even in the IT sector, is diversified and is not skewed in one or two scrips. That is for everyone to see. That is how the negative impact on the portfolio, with the falling prices of stocks in the IT sector, is the least in the case of UTI, compared to all other mutual funds.

Do you think that US-64 is a good option for small investors, especially if the risk-adjusted returns are concerned?

US-64 is the best option for small investors. They should invest in US-64 and be happy.

Is the investor perception, as revealed in a recent SEBI-NCAER survey about US-64, not linked to reality? Do you genuinely believe that it is the third least risky option or third safest option after bank deposits and gold?

That is what the investors have told the survey. I do not think one can dispute the findings of a reputed national research organisation under the leadership of Dr. Rakesh Mohan. It is the people's perception and one must recognise that perception. People believe that US-64 is still safe. It is only a few who are perhaps critical about it.

Are you not misleading the investors by your US-64 campaigns that do not portray the real picture?

No. We have portrayed the correct picture. What we have achieved, we have said. For instance, look at June 30, 1998. Everyone was lamenting that US-64 had negative reserves of Rs. 1,098 crores. Today we have achieved reserves of Rs. 5,300 crores, plus we have wiped out the negative figure. This means in two years time, we have in terms of portfolio, earned an appreciation of Rs. 6,400 crores. It is not an easy task for any fund manager. Let us take pride in what we have done.

Is US-64 today a scheme only for investors who can benefit from being in higher tax brackets?

Well, for those in the higher tax bracket, the yield is higher. For those who are not paying tax, the yield is still market-related. What are the other options available to them and what is the return they can get with two additional features of instant liquidity and safety of investment. So these two factors must also be examined, not just returns alone. So, if all the three are taken into account (return, safety and liquidity), US-64, even to non-tax paying public, offers the equivalent market rate of return. That is how investors have stayed with US-64.

Do you think the dividend tax exemption from US-64 and other open-ended funds would continue (with only one more year left)? If not, could there be more problems?

You should ask the Government this question.

Would it not be a good idea to freeze fund mobilisation in US-64 (many big open-ended funds in the US do this from time-to-time) and focus on consolidation?

I do not think so. That would be a negative way of looking at it. Growth is a must. We are in a transition phase. The economy should grow. Savings should grow and should be channelised into investments and that is when the whole economy grows. If you start shrinking the position of funds such as US-64, I think we will be shrinking the economy, which is not the right approach.

(To be concluded.)