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The Nemesis of Unit Scheme'64

It sums up all- the problem, its cause, the aftermath and finally the action plan for the fund of the week- US'64.

So much has been written about Unit Scheme - 64. But I will add to it and summarise the key issues. One, this happens when you pay more than you earn. Two, it is important to control and manage investor expectations, which can be achieved only with absolute transparency. Three, any mutual fund and savings driven institution is just as vulnerable to investors run and suspension of dealing can guard the interest of long-term investors.

The Genesis
It was a smooth ride for US-64 in early 1990s when the fund had a relatively low unit capital coupled with steady income, mostly accruing from high-coupon debt instruments. This also meant a steady accretion to reserves even as dividend was hiked from 18% in 1990 to 26%, each in 1993 and 1994. However, the high dividend yield attracted investors in hordes with the unit capital galloping to over Rs. 12,000 crore (up 62%) in 1993-94. That year was also the pinnacle for US-64 with the dividend outflow at an all time high of Rs. 3125 crore.

Lured by handsome returns, investors lavishly poured money into the fund. And UTI maintained an aggressive dividend policy. Even as unit capital surged to over Rs. 15,000 crore in 1994-95, yet another dividend of 26% created a hole for the first time as dividend distribution exceeded profits. While the payout was slashed to 20% next year, the net income of Rs. 1576 crore fell woefully short of the dividend outflow of Rs. 2700 crore. By now, the higher allocation to volatile equities had started to drag down US-64's returns and impact its performance. And, this finally culminated in to negative reserves in 1998. Thus, the extravagance of those four years now threatens a 37-year existence.

Investor's Action Plan
You can not sell your units now directly to UTI and you have to wait till redemption starts again. And the option to sell Unit '64 in the market will not fetch you full value. As we do not know the value precisely and sellers in the fund will be much more than buyers. Meanwhile, you can objectively define your expectation from investment in Unit '64. If you need very regular annual income, moving out of Unit '64 will be desirable. Post-office monthly income plan, an open-end income fund or open-end MIP may be a suited investment. But if you want steady income and growth as well, Unit Scheme '64 may still be a suited vehicle. And this will depend on the shape of the fund based on its pricing policy, portfolio and its strategy. And you cannot decide objectively till everything about the fund gets clearer.

Fund Update:
For the week ending July 6, 2001, the markets lost 151 points (-4.37%) on the Sensex and 78 points (-4.8%) on BSE National Index. The sole gainer was Taurus Starshare (1.3%). And the biggest losers were ING Growth Portfolio (-7.9%), IL&FS eCOM Fund (-7.1%) and Alliance New Millenium (-6.8%).