UTI MIP 2000 (III): Avoid

Recommendation: Avoid

S. Vaidya Nathan

GIVEN the interest rate on offer, the lack of liquidity and the not so impressive track record (the guarantee notwithstanding), investors can avoid this Monthly Income Plan from the Unit Trust of India (UTI).

Investors in the Monthly Income Plan 95 (II) that is being redeemed, can also avoid an investment in the new scheme.

The UTI has launched the Monthly Income Plan 2000 (III). This is a close-ended scheme with a tenure of five years. The fund would offer liquidity by way of repurchases after the expiry of three years. The fund would also be listed in Wholesale Debt Market segment of the National Stock Exchange which may not be easy for retail investors to access and trade.

On the liquidity count, the fund comes off poorly. That too at a time when open-ended income schemes and monthly income plans are available. In this backdrop, the rates on offer do not seem to contain a premium element to compensate for the lack of liquidity.

The MIP 2000 (III) has all the other usual features of a UTI MIP. The capital invested is protected on maturity by the UTI's Development Reserve Fund. The units would be redeemed at par (Rs 10 per unit) or the NAV, whichever is higher. But the guarantee is not applicable to repurchases made before the maturity date. The protection comes at a price that is locked in investments for five years.

The UTI has indicated the returns for the first year. The tax free returns in the hands of investors would be 10.20 per cent per annum in the annual and cumulative plans and 9.75 per cent per annum payable monthly in the monthly income plan. This is after a dividend tax of 22 per cent.

The returns for the subsequent years would be declared in advance in every March. The minimum investment amount is Rs 10,000. The asset allocation pattern indicated suggests that at least 80 per cent of the funds may be deployed in debt instruments and a maximum of 20 per cent may be invested in equities.

Though the latter has the potential to deliver additional returns, it comes with higher risk. And the higher returns would be possible only if the portfolio of stocks is well managed. In this context, the track record of the UTI does not inspire confidence. The equity component may also mean liquidity at below the face value if the NAV is lower due to market conditions.

The interest rate on offer also appears to be on lower side, given the general trends in inflation and interest rates which have been on an uptrend. AT this point in time, it may not be appropriate to lock-in into an investment with a five year time horizon. Instead of going in for the UTI MIP in which only the guarantee of capital protection is a feature, investors can go for open-ended income plans and use the systematic withdrawal facility. This way they may have good liquidity and at the same time, may also get better returns based on the performance of the schemes so far.

Fund Manager :Unit Trust of India

Fund Type :Income

Price :Rs 10 per unit

Options :Monthly, Income and Annual

Minimum Investment :Rs 10,000

Liquidity :repurchase after three years/listing

Offer Opened :August 30, 2000

Offer Closes :October 13, 2000