Yours Faithfully, Unit 64 Investor

This year, investors in the Unit Scheme 64 (US-64), discovered that their worst fears had come true. In an unprecedented move, Unit Trust of India(UTI) stalled the sale and re-purchase of US-64 units in July.

The bad news was accompanied by a paltry dividend of nine per cent - even lower than the yield on government securities. For the informed investor, the event didn't come as a surprise at all though. Many corporates had pulled out almost Rs 4,000 crore in the two months before disaster struck.

The Rs 15,000 crore scheme tumbled in rough terrain because of allocating too much of its funds to stocks. As on 30 June, 2001, the scheme had invested around 68 per cent of its net assets in equities. Tumbling stock valuations since the first quarter of the past year saw the fund's asset values erode massively along with the slide in the market.

 

While the US-64 scheme remained one of the best investment vehicles for over three decades, things started to turn awry in the past few years. The fund was able to generate steady returns initially on the back of a predominantly debt-oriented portfolio. But, over the years, it found its equity allocation increasing because of warrant conversions.

As equity markets turned volatile, the fund came under tremendous pressure as it found itself unable to earn enough income to sustain its dividend pay-outs. So, the fund opted to continue payment of its high dividends from its capital. The tremors of its financial problems were felt first in June 1998, when the fund recorded negative reserves to the tune of Rs 1098 crore.

According to the recommendations made by the Deepak Parekh committee in February 1999, the scheme had to turn net asset value-based within three years as also achieve a balanced mix between debt and equity. But with uncooperative markets, there seemed to be no signs of any favourable changes taking place in the US-64 scheme till March this year. It was inevitable that the scheme would be forced to undertake drastic action to make up for the inertia. So it did.

But reported resistance from the Finance Ministry compelled the Trust to rework its strategy and offer an exit route to the small investors. Still, the re-purchase price was fixed at Rs 10 - far lower than the usual July price of around Rs 13.50. Yet, investors haven't been scrambling to pull out of the scheme, as had been widely feared.

Redemptions in the past five months have amounted to around Rs 400 crore. Come January 2002, the scheme will disclose its true net asset value and operate like any other mutual fund scheme. It looks like the time has come for investors to evaluate the scheme based on investment objectives and the ability to generate the required returns and not simply on sheer faith that the government, come what may, will not let this popular and massive scheme go under.