UTI Monthly Income Plan 2001: Avoid

Recommendation: Avoid

Aarati Krishnan

THE UNIT Trust of India's first Monthly Income Plan (MIP) for 2001, a close-end fund, is open for subscription.

The plan has three investment options and assures an income distribution of 10.20 per cent per annum under its annual and cumulative options for the first year.

The monthly option assures 9.75 per cent payable on a monthly basis. The fund will invest up to 20 per cent of its net assets in equities, with the balance in debt and money market instruments. Like earlier funds in the MIP series, investments in this scheme will carry a three-year lock-in period, after which repurchases will be made at NAV-based prices.

Investors are assured a repurchase price of Rs 10 once the fund completes 61 months of operation. These returns are guaranteed under UTI's Development Reserve Fund. The fund reserves the right to extend the scheme beyond five years.

The returns assured by the fund for the first year are on a par with those offered by most debt-oriented funds. Most income funds have managed to earn yields of 10-12 per cent over the past year. But investors can avoid the UTI MIP 2001 because of the disadvantages associated with its close-end nature. Since investments will be initially locked-in for three years, investors cannot pull out their money even if the scheme underperforms expectations in the initial three years. Investors will also be foregoing the flexibility to switch to alternative superior investment options in this period.

For investors seeking monthly income distribution, several open-ended monthly income plans from private sector-sponsored mutual funds are in operation. These appear to offer a superior alternative. The one-perceived disadvantage with such schemes is that since their returns are correlated to the overall interest rate environment, the dividend may fluctuate from month to month. In fact, a few open-end MIPs were forced to skip their monthly dividend payouts on a couple of occasions in 2000, after an unexpected interest rate hike by the RBI last year.

Investors can, however, get around this problem by using the systematic withdrawal plans, which allows investors to redeem a specified number of units from the open-end scheme each month. In this way, investors can make sure that the monthly income from an open-end fund is not interrupted. In addition, such withdrawals will also be free from the dividend distribution tax which is levied on dividend payouts. Investors seeking to minimise their tax outgo on mutual fund units should, however, re-evaluate their investment decision based on the changes in tax structures in the coming Budget.

Nature of fund :Close-end

Objective :Monthly income, with annual and cumulative options

Minimum investment :Rs 10,000

Liquidity :Repurchase at NAV-based price after 3 years

Offer opened :January 8, 2001

Offer closes :February 21, 2001

Fund manager :Unit Trust of India