US-64: Hold investments, cut exposures

S. Vaidya Nathan

THE board of trustees of Unit Trust of India is set to meet on July 2 to consider the dividend for its various schemes.

But it is certain that the dividend on US-64 would not be near the levels of 13.75 per cent paid out for 1999-2000.

US-64 is slated to move to a NAV-based pricing in the course of 2001-02. The board of trustees is also likely to announce the sale and repurchase prices which would be out of line with NAV if UTI does not change track.

Recommendation: As far as US-64 goes, the following may be the suitable course of action for investors.

* Fresh investments should be avoided even if UTI does its traditional pitch of a special July price. Any investment now may run into straight losses (when NAV-based pricing is introduced) since the NAV and repurchase price are now wide apart. This may narrow if UTI fixes a lower repurchase price but still a loss may loom on the initial investment.

* In the unlikely event of an immediate switch over to NAV-based pricing too, investors should stay clear of US-64 as its track record has been unimpressive. Investors may be better off going in for a debt scheme as well as some investment in a growth scheme with good performance over a three to five year period.

* Existing investors can cut exposures in the fund in July / August, after receiving the dividend, since it may not be appropriate to wait for the slight 5 to 10 paise hikes UTI may effect from month to month.

Getting out earlier may ensure that investors do not have to contend with the uncertainties regarding the timing of a move to NAV-based pricing. Investors who have been with the scheme for long years should cut exposures as NAV-based system may mean losses for even such class of investors.

* Investors who are in the higher tax bracket may find the dividend yield attractive even if the dividend distribution is around 9 to 10 per cent. But such investors would have to contend with erosion in capital and uncertainties over the investment performance in later years.

There may also be some uncertainty over the dividend exemption granted to US-64 and other open - end funds with equity exposure of more than 50 per cent. This is due to run-out this year.

* Re-investment of dividends, if any, back into US-64 can be avoided.

Portfolio overview: The fund had managed to put up a decent show in 1999 and 2000 riding the coattails of Ketan Parekh stocks and the attendant bull run. US-64's tech/telecom/media sector exposures are far removed from frontline stocks. This could mean sizable losses and difficulties in liquidation.

The exposure of around 22 per cent in the Reliance group stocks is also not exactly a cause for comfort though the price trends in these stocks have provided some stability in the last 18 months. UTI's reluctance to trim exposures in such stocks from time to time makes such concentrated exposures a risky strategy, particularly given its size .

The returns in absolute and risk-adjusted terms are well below what can be obtained even in debt instruments. There is a clear case for investors to pare exposures in US-64 when the going is good in terms of NAV - delinked prices from the point of view of existing investors.