US-64's higher equity exposure violates recommendations
Mar 06, 2000

Unit Trust of India's flagship scheme - US-64 has recorded reserves of over Rs 60 bn as on 31st December 1999. This is despite a fall of over Rs 10 bn in unit capital due to higher redemptions. US-64 owes its phenomenal success to higher equity exposure, despite recommendations against such a move by the Deepak Parekh committee.

US-64 is the largest scheme in the country and is equal to a few mutual funds put together. Given the size of the scheme, US-64's buying/selling has a significant impact on the stock markets.

As reported earlier by equitymaster.com the turnaround in US-64's reserves can be attributed to higher exposure in infotech stocks. Consequently, its reserves have increased sharply from a deficit of Rs 26.0 bn in December 1998 to a surplus Rs 35.8 bn in December 1999. This is even more commendable given the fact that its unit capital has declined sharply by more than Rs 10.0 bn in this period.

Although US-64's reserves have appreciated largely on the back of higher equity exposure, it has pursued a policy contrary to the recommendations of the Deepak Parekh committee. After US-64's sharp erosion of reserves in FY98, the Deepak Parekh committee had recommended higher exposure to fixed income securities (bonds and debentures) as opposed to equity. UTI seems to have done exactly the opposite by increasing exposure to equity and reducing exposure to fixed income securities by over 50%.

US-64's performance over the last 6-8 months (thanks to the booming markets) has justified its move to pump in funds in equities, as opposed to fixed income securities. However, if the markets had gone bust, UTI would have paid a heavy penalty for violating the committee recommendations. Its move to increase exposure to equities (particularly software) must be viewed in this perspective.

This raises questions like whether such committees (like the Deepak Parekh one) serve any purpose if their recommendations are going to be disregarded blatantly. Moreover, should there be some move by the government to ensure that the committee recommendations are considered and implemented. After all US$ 1 bn (UTI's cumulative investments in IT stocks in December 1999) is an abnormally large exposure, that too belonging to middle class investors who have reposed a lot of 'trust' in UTI.