Life After Us64

We told you so. In our issue dated 28 May 2001, we said it may be last chance to exit from Unit Scheme 64(US64), at a decent price. We were proved right in July 2001, when the fund shut down its repurchase window and reopened it the following month only to offer to redeem units up to 3000 in number at Rs 10. The scene is no different now.

The Trust has hiked the number of units that can be repurchased by an investor to 5000. Continuing with the earlier scheme, the repurchase price is Rs 10.5 for this month, and will be revised upwards by 10 paise every month till May 2003.

In May 2003, an investor can redeem the first 5000 units at Rs 12, while units over 5000 will be redeemed at Rs 10 or the net asset value (NAV) whichever is higher. All this when the NAV of the scheme has been pegged at Rs 6.09(as on 3rd January 2002).

Granted, running a Rs 13,000 crore fund is a humongous task, and with the Sensex down to 3200 levels, one shouldn't have been surprised that the scheme is going through tough terrain. But given its objective of being a balanced fund, and the longevity of its existence the fund's maiden NAV is indeed shocking.

Ironically, the fund's biggest trouble came from its investors. Thanks to the steady and liberal payouts handed-out by the fund, it became the most popular and trusted investment vehicle among individuals, corporate investors and charitable trusts in the nineties. Its capital peaked to a high of Rs 15300 crore in June 1995.

In pursuit of higher returns, US64 has been continuously hiking its allocation to equities. Last year, the fund had about 72 per cent allocation to equities and rest in bonds and cash. Equally damaging has been the continual interference from various quarters in the government in investment decisions, and the arbitrary nature of such decisions.

After a 37-year history of generating excellent inflation adjusted return, the fund has finally changed in its character. Since January 2001, it has become a NAV driven product like any other normal mutual fund. In other words, it has lost its identity as an investment vehicle that can provide safe and steady returns irrespective market conditions.

For existing investors, it makes sense to stay put as the fund assures a 12 per cent annualised return till May 2003 for holdings up to 5000 units. Even for the others, it makes sense to remain invested till May 2003 as they will be eligible to redeem units at par value if the NAV remains below par. Based on the NAV based redemption price, it would translate into 40 per cent assured return. One is unlikely to get such a deal in any other investment option.

Should you buy the fund now? That's depends on what you are looking for. The fund portfolio is likely to be revamped in favour of debt (75 per cent). Even with a 25 per cent allocation to fickle stocks, its returns will be influenced by market conditions. The balanced fund with a similar asset allocation Canpremium has generated a return of 20 per cent in the past three years.

With its bulk, it may be increasingly difficult for US64 to beat market averages. Currently, the fund has assets of Rs 7242 crore while its market value of investments is about 13,895 crore.

Return to existing investors will accrue only after borrowing costs of the fund are met which stands at a whopping Rs 6500 crore. It is better to avoid fresh investments in the fund when it is attempting to restructure.