US-64: Need to use the options well

S. Vaidya Nathan

THE flagship fund of Unit Trust of India, US-64, will be net asset value (NAV)-based from January 1, 2002. This will end an era of opaque pricing where investors had little idea as to the value of their holdings.

Changes to liquidity package: UTI has now made the following key changes to the special liquidity package for US-64 announced in July.

The limit for repurchase under the package has been enhanced to 5,000 units per investor from 3,000.

For existing holdings in excess of 5,000 units, UTI has now offered redemption at net asset value or at an assured repurchase price of Rs 10 per unit, whichever is higher, if redemption is done on May 31, 2003.

If existing holdings in excess of 5,000 units are redeemed between January 1, 2002 and May 30, 2003, it will be at NAV-based repurchase price.

These are applicable to investors as of June 30, 2001.

Recommendations: The following are the positions that may be taken by investors with regard to US-64 depending on the size of their holdings.

Avoid fresh investments: In the first place, investors need not contemplate any fresh investment at all in US-64 though UTI is dangling the carrot of sale of units at NAV in January. Later, a load of one per cent on NAV will be applicable. The track record of US-64 is not one that inspires any confidence. The scheme has now been sold as a balanced scheme, which is a better positioning.

But investors desirous of investing in a balanced fund can look at better options with mutual funds such as Alliance Fund and Kothari Pioneer Pension Plan among others. Or they can also choose a combination of a diversified equity fund such as Zurich India Equity, Pioneer ITI Bluechip, Zurich India Tax Saver and debt funds such as Pioneer ITI Income Builder, UTI Bond Fund, LIC Bond Fund and Sundaram Bond Saver.

Even if fresh tax incentives are given to invest in US-64 in the forthcoming Budget, it may be better to avoid the scheme till its portfolio stabilises and UTI shows better transparency in operations across its schemes over a period of time.

Holdings up to 5,000 units: Investors as of June 30, 2001 should hold their exposures of up to 5,000 units. The assured repurchase price of Rs 12 per unit backed by the guarantee from the Government makes this component a safe one. There are not too many options which offer similar returns though this has nothing to do with the underlying value of US-64 or its performance. It is just the bail-out guarantee that makes holding these exposures attractive.

Holdings over 5,000 units: Investors with holdings in excess of 5,000 units could evaluate the position based on the NAV that is announced.

If the NAV is less than Rs 9, it may make sense to stay invested and exit at repurchase price in May 2003 as the rate of return would be in excess of 10 per cent per annum. Since this is also backed by the Government guarantee, investors can consider this option. But in the intervening period, if the NAV crosses the Rs 9.5-mark or Rs 10, investors should exit and switch to funds with a better track record

If the NAV is more than Rs 9, it may make sense to exit now and switch to better performing equity / debt / balanced funds with a smaller and more manageable corpus size. This view may be taken irrespective of how long one is invested in the scheme. Repurchase price would be at NAV if units have been held for more than three years, at NAV minus one per cent if held for two to three years, at NAV minus 1.5 per cent if held for one to two years and NAV minus 2 per cent if held for less than a year. The staggered repurchase pricing structure is perhaps intended to lure investors to stay on but this can be ignored completely as long as the repurchase price that you would get now comes to around Rs.9.

Constant evaluation: If the NAV is lower than this level, investors would have to constantly compare the NAV and the Rs 10 on offer to determine the decision of an exit or to stay on through May 2003.

All such investors who stay on till May 2003 to avail of assured repurchase package should make sure they exit the scheme on May 31, 2003 as otherwise they would lose the benefit of the bail-out package on offer. This course of action must be taken irrespective of how US-64 performs in the intervening period and the market conditions.

Even if the NAV is higher than either Rs 12 per unit (which is relevant for decision making by those with holdings of up to 5000 units) or Rs 10 per unit (which is relevant for decision making by those with holdings in excess of 5000 units), investors should exit at the NAV then. To wait would mean running the risk of NAVs going down and also missing the assured price package. If the NAV then is less than assured repurchase prices, using the repurchase package becomes an obvious but important choice. Make sure you have all the necessary documentation by April 2003 so that you do not miss out on the offer for any reason.

Choose income option: UTI is now offering an income option and a growth option. All investors irrespective of their risk profile would be better off with the income option. Investors should also avoid going in for the dividend re-investment option. If you are part of this already, it may be better to opt out of it.

Tax effect: The effect of income taxes also needs to be considered before investors decide to hold or exit. Sale proceeds received from US-64 will not suffer taxation as investors would be booking a loss on their investments. Ideally, the after-tax return on comparative investments should be compared to the return on US-64 by those with holdings of over 5,000 units and who decide to stay on for the present.

Ignore the re-positioning: UTI has indicated that it would re-position US-64 as a balanced fund. It plans to invest up to 75 per cent in debt and a maximum of 55 per cent in equities with a minimum of 25 per cent. The fund is also offering an income option under which investors would get an income distribution or have the option of re-investing it. Under the growth option, the income would be accumulated. UTI plans to bring down the present equity level of 61 per cent to the maximum of 55 per cent or less by December 2002.