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What should be done with Unit Trust of India?

The Titanic of the Fund Industry is dwindling amid high tides. The sheer size and wide network seems to be the only savior for the behemoth.

What ails UTI?
To put is simply -- Times have changed radically and UTI hasn't. Everything in our securities and financial markets has changed rapidly in the past decade, but UTI.

A decade back, UTI was the dominant player in the equities and mutual fund market. This changed gradually with the entry of public sector funds, then FIIs and private funds as well. With growing institutionalization, the securities brokerage industry evolved to closely tracked stocks and put up research to catalyse transactions. The stock exchanges transformed with screen based and paperless trading has eased transactions.

The lending practices of our financial institutions have undergone a change. Lenders no longer lend with a convertibility clause. More importantly, a quality borrower today looks for the most economical source of capital. The banking industry has changed with the growing emergence of foreign and private banks in the retail marketplace.

In the mutual funds business, first the public sectors funds surfaced and then the private funds. Private funds have been able to create a niche for themselves. But more importantly, they are changing the rules of the game. These funds starting from clean slate without any baggage of evolution, today offer a transparent and a wide range of products with a strong customer focus. They are also driving innovations. The non-guaranteed open-end debt fund segment was first invented by the private funds. These funds offer customers a wide choice of variants -- Medium-term debt or gilt, Short-term debt funds (cash funds) or gilt fund, Money Market Funds, the Serial and Fixed Maturity Plans and the Monthly Income Plans. Today, they account for 37%, with Rs 35,641 crore of assets under management of the total mutual fund assets of Rs 96,795 crore. And the UTI including the public sector funds is almost non-participant in this growing segment.

Every aspect of UTI business seems imperfect -- products, positioning, perception, performance and practices. On the product front -- definition of US-64 will be something like this -- a balanced fund which is perceived an income fund, which many years ago was a debt fund, in mid-90's was rewarding as an equity fund, and is priced like a bond, which does not guarantee return but government works on a bailout package when equity assets deplete -- pretty confusing. And its offer letter does not state anything. MIPs, debts fund with a small equity allocation, guarantees return with post-dated cheques and falters. Globally, no fund manager assumes market risk himself. Only governments, corporations and banks borrow for a defined term on assured return. All its equity funds look alike -Mastergain, Masterplus, Grandmaster, etc. And most of them are converts -- from closed-end to open-end and almost equally disappointing or rewarding.

On performance of its funds, it is said that UTI is a big contrarion investor -- it normally buys stocks, which nobody does, and the performance number of its fund's speak loudly. Most of the funds struggle to achieve mediocre performance. The part of mutual fund business so intensely driven by greed and fear, an asset manager must have the flexibility and accountability, and of course system to reward performance and otherwise. In a people's business and competitive surrounding, the UTI organisation by design is just not geared to attract and retain best talent.

And the business practices are out dated now. UTI does not pay trail commission. So its strong agent network spread across the country is paid only to sell, but has no incentive to serve. Besides, the regulation for business conduct has also evolved. And UTI has been forced to become compliant.

Should US-64 be made NAV based immediately?
Dealing in US-64 should be based on NAV at earliest. Any short-term solution can only be on a creative account and will add to the confusion and noise. It is opportune time to demystify perception. As a pleasing solution can only be a giveaway from government. In fact the crisis could have been averted altogether by embracing regulatory compliance than skirting it. And in a limited way this would have brought some degree of accountability in the functioning, driven by pressure to perform.

There is also a strong economic case as well. The long-term return from US-64 is not that bad. And bad performance in a bad market is okay.

US-64: Holding Period Returns
  As on May 31 '01  Today
   @ Rs14.25/Unit   @ Rs.10/Unit
10 Year Returns 16.20% 14.45%
9 Year Returns 15.14% 13.10%
8 Year Returns 12.43% 10.07%
7 Year Returns 11.00% 8.14%
6 Year Returns 11.29% 7.79%
5 Year Returns 10.69% 6.21%
4 Year Returns 9.47% 3.54%
3 Year Returns 7.46% -0.73%
2 Year Returns 8.29% -4.33%

How can periodic crisis be avoided in UTI?
Looking at its objective, the history and genesis, Unit Trust of India has truly emerged as a dominant force in the Indian securities marketplace. But we can do without a government owned mutual fund which goes wrong too often, which is understood or perceived wrongly and adding to the chaos. To channelise household savings in the India, we anyway have National Savings Organisation (NSO), the massive government owned and administered savings organisation offering wide ranging products with by far has the largest depositor base. The schemes offered by NSO has a wide reach, is understood properly without ambiguity.

However, with its baggage and changed environment, its charter has to be rewritten. The Unit Scheme-64 crisis has triggered this intense debate, which should be considered an opportunity to build a customer focussed, profitable and robust financial institution. And by rewriting its objective, fine-tuning its legal structure, by forming an AMC and become a people's orgainsation to attract and retain best talent, UTI can well pass the US-64 and other crisis on the horizon, to emerge a world class institution. Its core strength -- the size and reach can still be solid foundation for rebuilding UTI.