Yes, but only if is the Unit Trust of India (UTI). The discontinuance of Rajalakshmi Unit Plan  II has come as an unpleasant surprise to many investors and they like to know how much more they can trust the country's largest money manager.

The Rajalakshmi Unit Plan  II is a closed-ended fund launched in October 1992 for the benefit of young girls to help them secure a stable future in adulthood. According to reports in leading dailies, Mr B G Daga revealed that the fund garnered Rs 5.3 bn between October 1992 to October 1993 at its launch. At redemption (in 2012) UTI would have had to shell out Rs 100 bn towards its investors to fulfill its undertaking of giving them a return of 16.75% annually.

Rs 100 bn is a huge commitment even for UTI and it realised that early on and terminated the fund prematurely. In the words of P S Subramanyam (UTI, Chairman)  With the liberalistion of the economy, interest rates have come down substantially. It is no longer possible to sustain the high return of 16.75% on the scheme. UTI would have bled had it continued.

The scheme may if circumstances so prevail not being in the interest of the unit holders or the trust be terminated with sufficient notice to the Government. All unitholders who have participated in the scheme shall be paid the value of the units standing to their credit at the final repurchase fixed for the purpose. Besides receiving the final repurchase price so determined, no further benefit of any kind either by way of increase in the repurchase value or by way of dividend for any subsequent period shall accrue. (clause xxvii of scheme provision)

This raises some very pertinent issues, the most being about the trust factor. With over 2/3rd of the total assets in the mutual fund industry and over 35 years experience in fund management, a statement like that from the chairman is unlikely to inspire a lot of trust and confidence in UTI.

Coming specifically to Rajalakshmi, it was launched in 1992-93 when the liberalisation process was well under way marking the onset of a lower rate regime. Surely UTI saw that one coming. And to commit returns at 16.75% for 20 years even in a pre-liberalisation, high interest rate regime requires some exceptional fund management skills.

Which brings us to the title of this View, Can MFs get away with this? The truth is they shouldn't be allowed to. And not everyone can point fingers at the market watchdog, the Securities and Exchange Board of India, SEBI for being slack in this regard. This is because not all of UTI's schemes come under SEBI's purview. So while Canbank MF was made to fulfill its commitments to investors by SEBI, the latter has maintained a rather studied silence so far with the Rajalakshmi Unit Plan.

With the premature redemption of Rajalakshmi Unit Plan II, the future of its sibling funds, RUP 1994 (assured rate 14%) and RUP 1999 (12%) have also become uncertain. As the country moves towards a lower rate regime, investors may want to prepare themselves for another shock in future if UTI decides to terminate either or both of these funds.

Add Comments