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Monday, Apr 14, 2003

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US-64: Retiring in style!

Sanchita Das

DESPITE the rude shock of 2001, the investors of Unit Scheme 1964 (US-64), are gearing for a secure landing on May 31, this year, when the country's oldest and biggest mutual fund scheme closes shop. In fact, they go home with a final round of pampering that is more in the style of US-64 in its heydays.

US-64 investors have for long been cocooned from the vagaries that define any true mutual fund investment. They are a class that was spoilt by assured returns and enjoyed steady and liberal payouts.

After all, the fund did not concern itself with its NAV for the first 37 years of its existence.

This balanced fund (also the flagship) of the Unit Trust of India (UTI) thrived on equity investments (accounting to as high as 72 per cent of its portfolio) in its pursuit of high good inflation-adjusted returns.

In fact, for a good part of the 1990s they barely saw dividends below the 20 per cent mark. And since its inception, US-64 had the fancy record of not missing dividends for even a single year.

The annualised dividend payout of this fund, before reality knocked on its door in 2001, was 13.5 per cent. Of course all this changed in the summer of 2001, after US-64 moved into the realms of NAV in January that year.

For the first time in its history, the fund actually skipped dividend, confronted by it negative reserve position. Besides, there was the mismatch between the price of its units and the market value of its investments.

But public uproar and intense political lobbying soon came to the rescue of the investors. The six-month freeze on redemptions (audaciously imposed to cut off panic withdrawals) was quickly revoked. On August 1, UTI offered a buy-back at the face value of Rs 10 on holdings below 3000 units.

The buy-back offer climbs by 10 paise with each passing month. According to the final redemption plan put in place, unit holdings below 5000 UTI will be offered Rs 12 as the redemption price on May 31, 2003.

This is a generous offer considering the NAV of the scheme is still hovering at about half this amount at around Rs 6.03 per unit. On units above the holding of 5000, the offer is Rs 10 or the NAV, whichever is higher.

Of course, there is no doubt in anybody's mind as to which is going to be higher! The category C units or units bought with the scheme's dividends reinvested will fetch only the prevailing NAV.

If not redeemed, they can move (at the NAV on May 31) to the new balanced fund US-02, whose investments are being carved out of US-64.

But the clincher yet, has been the offer to those who choose not to redeem their holdings. They get to convert to the tax-free bonds with an interest rate of 6.75 per cent.

This, indeed, is attractive for the tax-paying companies and high net-worth individuals. What is more, UTI's arrangement with some of the financial institutions, such as UTI Bank and LIC, has guaranteed the bond's liquidity. In a falling interest regime, there is a good chance that the bond will be traded at above par value.

The past weeks have shown that investors have already woken up to what is on offer and US-64 is suddenly in demand in the last leg of its life. True, many an investor, particularly those who entered in the 1990s, have lost a lot of money on US-64 and the even the current offer cannot compensate them.

But the fact remains that the US-64 investor has largely been shielded from the true harshness of the situation in the market place. Even if this has cost the exchequer Rs 6,500 crore.

(The author is the Editor of Sify Finance. The views expressed here are her personal ones)

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