US-64 delivers another shock
Sep 10, 1999

Author: PersonalFN Content & Research Team

As reported by a leading financial daily, Unit Trust of India's (UTI) flagship scheme US-64, has witnessed the steepest ever erosion of Rs 20.9 bn in its unit capital (13.3% of total unit capital).

UTI with assets in excess of Rs 605 bn (as on 31st July 1999), is India's largest mutual fund. It was set up in 1964, with the launch of Unit Scheme 1964 (US-64), its flagship scheme. US-64 garnered approximately Rs 250 m in that year, and has grown into a Rs 135 bn (post-erosion) scheme, which is larger than a few private mutual funds put together! Therefore US-64's buying and selling operations have a significant impact on Indian stock markets.

US-64 investors are now getting familiar with news of unit capital erosion. The 35% erosion in FY99, is by far the steepest recorded since 1992. But investors can take heart from the fact that US-64 reserves are still positive at Rs 1.3 bn (FY99).

At the end of FY99, its equity exposure stood at Rs 128.6 bn, (Rs 136.5 bn in FY98). This is after PSU stocks worth Rs 33 bn were transferred to a special unit scheme in line with the Deepak Parekh Committee recommendations. US-64 seems to have learnt its lesson well, as over the past year, it has reduced its exposure to debt as well as equity. Exposure to debt instruments has declined by 42% to Rs 19.1 bn. However, the exposure to gilts increased consequent to the Rs 3.3 bn worth of gilts that it received in exchange of the PSU stocks.

There is more bad news for UTI. Schemes like Mastershare'91, Mastergain '92, have witnessed huge net outflows. In the first two months of the current financial year, UTI's equity schemes have witnessed redemptions of Rs 8 bn. Slowly but surely, private sector mutual funds are eating into UTI's share. Figures reveal that from the incremental mop of funds this year, UTI's share plunge to less than 45% from a high of 75%.

Redemption pressure on UTI's scheme comes at a time, when investor interest in MFs is at an all time high. MFs in the private sector have witnessed significant increase in collections. They have taken the lead in launching innovative schemes and are more transparent in their disclosures, while the same cannot be said for UTI. Even private MF returns have far outperformed those of UTI.

In FY99, UTI initiated steps to restructure its portfolio, which have come a cropper and have failed to enthuse the investor. The investor sees no reason invest in UTI, which has failed to deliver on most counts. Faced with a variety of options, he is more keen on private sector MFs who have posted better results.