The government has announced a bailout package for UTI's investors in US64 as well as the monthly income plans (MIPs). If you are an investor in either of these schemes, what must be your next step?

First a review of what the government has announced. The government's package to introduce structural reforms in Unit Trust of India (UTI), Indi's largest mutual fund will not come cheap. The bailout package is in excess of Rs 140 bn (Rs 14,000 crores) and will be used to make good the government's commitment on meeting US64 redemptions until May 2003 and meeting all dividend and principal commitments in UTI's MIPs. (To receive daily NAVs of UTI's schemes in your mailbox for FREE, click here)

The government has split UTI in two entities  UTI I and UTI II. All schemes with administered NAVs  US64 (with the administered NAV) and MIPs will fall under UTI I. Schemes that are NAV-driven (including US64 units that were issued after January 2002) will come under the purview of UTI II.

As far as the management of the two entities is concerned  UTI I will continue to be managed by a government-appointed team. UTI II will be managed by a team of professionals and a board of trustees, somewhat how other private funds are being managed today. UTI II is eventually slated for divestment/privatisation.

What the investor needs to do?
US64 investors (with less than 5,000 units) who can exit while they can, should do so by May 31, 2003, when the administered price regime will end making way for an NAV-based system. With the administered repurchase price mounting to Rs 12 by May 2003, investors cannot hope for a better bargain given that US64's NAV is below Rs 6.

The tax concessions being doled out do not make any sense unless there is an impending dividend announcement. There was some news to the effect that a dividend declaration could well be in the offing to ease pressure on US64 outflow. If that is the case, investors need to access the impact post-dividend declaration, which in any case should at least be in the region of 15% to evoke interest. However, a dividend declaration will push the NAV even lower, so it's a little between the devil and deep sea for investors.

Investors may want to consider the opportunity loss of staying invested in US64 for too long. Long-term income funds have been able to perform steadily even in this declining interest rate scenario. Investors could consider these funds for parking their US64 redemption proceeds. Investors interested in a regular dividend stream can opt for the dividend option. (Would you like to receive dividend payouts daily in your mailbox for FREE?)

UTI investors have an alternative

Income (Long Term) Funds	NAV (Rs)	1-mth	6-mth	1-yr	3-yr	5-yr	Incep.
BIRLA INC B	24.1	1.1%	6.3%	14.3%	13.7%	13.4%	14.6%
ZURICH I HIGH INT G	19.8	1.1%	6.3%	14.1%	13.9%	12.8%	13.4%
K BOND DEP G	14.4	1.1%	5.8%	13.9%	-	-	13.8%
TEMPLETON INC G	20.5	1.0%	5.7%	13.6%	13.7%	13.4%	13.9%
GRINDLAYS SP SAV G	13.4	1.2%	5.2%	13.4%	-	-	15.6%
SUNDARAM BOND A	18.4	1.0%	6.2%	13.3%	13.8%	-	13.6%

Investors in UTI's Monthly Income Plans (MIPs) have it much better with the government's assurance on fulfilling all principal and dividend commitments. Investors are advised to remain invested in the MIPs as any move to exit at this stage will entail losing out on assured returns.

So its mixed news for UTI investors. While US64 investors have to take what they are getting, which isn't much, the MIP investors find themselves benefiting significantly from the government's largesse.

 

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