Uti Used Us-64 Funds As Shock Absorber

The problems with UTI's flagship scheme US-64 and the erosion in equity portfolio of the scheme may have a direct bearing on other UTI schemes creating trouble for the trust if any of its other schemes run into redemption troubles, say UTI observers.

Leading market players believe that the US-64 scheme was often used by India's largest mutual fund to act as a shock absorber in a falling market. According to them, the root of all troubles surfacing in the scheme now is because the UTI management has used this hybrid fund to absorb shocks in its other schemes.

"We have witnessed in the past that fund managers at UTI have always banked on US 64 to absorb any redemption pressures on other schemes. It did happen when there was huge redemption on UTI Mastergain and India Fund at the same time. It was at this stage that UTI went for an inter-scheme transfer where US 64 absorbed the stock sold by these two schemes," a source said on conditions of anonymity.

The source also revealed that it is not impossible for UTI to declare the net asset value once a month. "The net asset value of US 64 is calculated every month. It can be declared or shown to the government or Sebi. It must be understood that the price fixed by UTI will digress from the net asset value due to the peculiar nature of the scheme," the source added.

Market players said that yield declared by UTI was not in tune with the market. "UTI has been declaring yields which was not market related. It was sort of free lunch for the investors which would not have gone on for ever," commented a fund manager with a UK-based fund.

UTI has about 64 per cent exposure in equities. Even as most stock indices moved down during the past couple of years, UTI continued to give above 20 per cent dividend for US-64, which was not realistic, say fund managers.

However, most fund managers said that India's largest mutual fund had become more market savvy. "The Unit Trust had been picking up stock lower levels and was able to off load the same at the higher levels to some of large foreign funds," a head of research with a leading domestic brokerage pointed out.

Critics are also of the view that most funds managed to stay afloat during this slump in equity markets because they had added growth stocks like in their portfolio.

However, UTI continued to ignore stocks in software and pharma sector in their portfolio for a long time. This is being viewed as a major flaw in the stock picking of UTI.

"UTI had got an extremely good trading cycle wherein it use to pick up stocks at lower level, when market was dumping them. And when the market moved up these stocks were then picked up by the foreign funds," said another fund manager.

The scheme has also large exposures in sectors like financial services through its State Bank and IDBI holdings and in steel through the Steel Authority of India.