Saving The Uti Way

The Unit Trust of India launched its sixth monthly income plan in 14 months on April 24, 1997. A late entry --- you have another two days to sign up. But is it a worthwhile investment?

Monthly Income Plan 97 (II) offers an assured monthly dividend at the rate of 14 per cent a year, for all the five years of its close-ended existence. Its less than the 14.5 to 15 per cent offered in the 1996 plans, but then the interest rates now are lower.

Like its predecessor MIP 97, MIP 97 II also has two investment options. One is the regular Monthly Income scheme and the other is the Capital Growth option.

Monthly income option: Under this option, the trust will pay assured dividend of 14 per cent through post-dated monthly warrants. Depending on the date you join the plan, you will be compensated upto June 30, 1997. One consolidated warrant for the period upto September 30, 1997 and six monthly warrants for October 1997 to March 1998 will be sent with the unit certificates. For subsequent years, the warrants for the whole year will be sent in March/April. But dont forget to encash them when their time comes. They cant be duplicated.

Capital growth option: The returns will be assured and cumulated at the rate of 14.93 per cent a year such that Rs 2,000 will become at least Rs 4,012 on maturity. No dividends will be paid. However, you will still be compensated at the rate of 14 per cent a year for the period from your joining the plan.

Under the Monthly Income Scheme, on an investment of Rs 2,000 you earn Rs 280 a year as dividend over 12 months, amounting to Rs 1,400 at the end of five years. That dividend comes to you on a regular basis, unlike in the case of the capital growth option, which in the end gives you more.

Ultimately, the benefits of both are evened out on account of the time value of money. Units on both options will be listed on the Over The Counter Exchange (OTCEI) within six months for trading. And three years down the line, UTI will offer a repurchase facility at Net Asset Value (NAV) based prices. You can make a full or partial repurchase. If partial, you have to have a balance of units worth at least Rs 2,000 (face value).

The NAVs will be determined separately for the two options. Values will be published in the press six months after the closure of subscription, and issued on a monthly basis thereafter.

UTIs plan offers the facility of Electronic Clearing Services (ECS), introduced recently by Reserve Bank of India. The facility aims at getting rid of the paperwork that goes into issuing dividend warrants.

Under this scheme, you give UTI your bank name and address, nature and number of account. And the dividend is automatically credited to your account. That effectively frees you of the hassle of encashing warrants every month, worrying about the validity period and misplacing warrants. But this facility is available only to subscribers from the four metros, whose dividend income is less than Rs 25,000.

Can the Trust justify 14 per cent returns? Assume that the scheme collects Rs 100 crore (the minimum it plans to collect). The initial expenses are 3 per cent, which will be written off over three years because repurchase starts after that period. The investible amount with the trust in the first year is Rs 97 crore. It is claimed that 90 per cent of the corpus will be invested in debt instruments, the remainder going into money market instruments and equities.

UTI expects the yield to maturity on debt instruments to be around 16.8 to 19 per cent, which means the weighted average yield on debt instruments would be 17.75 per cent. They expect the equities and money market securities to yield around 8 per cent. Thus, the weighted average yield of the portfolio is 16.27 per cent. Taking annual expenses at one per cent, it still leaves UTI with 15.27 per cent, sufficient to pay 14 per cent a year on a monthly basis (an annualised yield of 14.93 per cent) to its subscribers.

Of course, the above scenario is just illustrative and based on the market conditions at the time of the launch of the plan. But there is a catch here. As mentioned earlier, they claim that 90 per cent of the corpus will be invested in debt instruments. But in another part of the letter of offer, under the head Investment Objectives, UTI says that of the funds collected under the scheme, at least 80 per cent will be invested in fixed income securities and money market instruments, and 20 per cent in equities and related instruments. So which one of these investment mixes are they going to follow? If they follow the latter, then the justification for paying a 14 per cent dividend is on shaky grounds. Of course, the words at least for fixed income securities and money market instruments and the word upto with regard to equities gives them some leeway for changes. But how do they propose to get 14 per cent if they follow the latter statement in their letter.

Moreover, while in the former mix they club money market instruments with equities, in the latter, they club them together with debt instruments. And lets assume that the yield on equities is 8 per cent (as claimed by them in their justification). Let us also assume that with the money market instruments clubbed with the debt instruments, the average yield is still 17.75 per cent (a liberal assumption given that money market investments do not yield such high returns). Overall, the weighted yield of this mix is only 15.32 per cent.

Taking annual expenses at one per cent, UTI is left with just 14.32 per cent and they are assuring a yield of 14 per cent. One slip-up in their investment management or expenses, or a change in market conditions, and they will be done for. But, dont you worry, your returns are assured by the Trusts Development Reserve Fund.

Tax Breaks: The income from units of the Monthly Income Plan 97 (II), like all other UTI plans, will enjoy deduction from income upto a limit of Rs 15,000 under Section 80L of the Income Tax Act, 1961. The value of investment in units under the plan is exempt from Wealth Tax. Long term capital gains, if any arising from the plan, will be allowed deductions under Sections 48 and 112. And subject to your availing of the repurchase facility after three years, your investment of the entire or part of net consideration arising out of transfer of long term capital assets in the plan will be eligible for Capital gains tax exemption under Section 54EA. Five-year close-ended plan

Plan offers two options: monthly income and capital growth

Assured dividend of 14 per cent for all the five years, payable monthly under monthly income plan

Under capital growth option, Rs 2,000 will at least become Rs 4,012 on maturity

Minimum subscription- Rs 2,000

Listing on the OTCEI within six months after closure of subscription on June 7, 1997

Repurchase under both the options to begin three years after the plan commences, ie on July 1, 2000

Scope for capital appreciation on maturity Tax Benefits under Section 80L, 48, and 112 of the I T Act Capital gains tax exemption under section 54EA