The US-64 package was again in the limelight, while IDBI downgrade bruised the bond market sentiments.
21-Jul-2001 •Research Desk
After lot of noise, US-64 has offered to provide a limited liquidity at depleted value of Rs. 10. This implies a loss or no return to all US-64 investors who came into the fund in recent years. For instance, an investor who bought US-64 units in May 2001 has lost 26 per cent in a matter of just over two months.
Now you can sell at least 3000 units US-64 on August 1 and realise Rs. 10 per unit. Should you? Before you redeem your investments, consider your options. For every unit holding account, the offer guarantees return for your first 3000 units. You can sell only 3000 units back to UTI at Rs 10 per unit in August '2001. The price will be revised every month and will go up by 10 paisa every month till May 2003, barring the month of June 2002. Hence, the repurchase price will be Rs. 11 in July 2002 and Rs. 12 in May 2003. Dealing in the fund (sale and redemption) will commence from January 2002 based on NAV based prices. For your first 3000 units the price applicable will be Rs. 10.50 in January 2001 or NAV whichever is higher.
For the remaining holdings, NAV based price will be applicable. And it could be any amount. From January 2002, there will be two class of investors of Unit Scheme '64. Old investors, who still own their first 3000 units and another class of old investors with over 3000 units and all new investors in the fund from January 2002 (if someone still buys US-64). UTI has clarified that it will not allow dilution of NAV for the remaining investors. For your holdings of over 3000 units, you don't have much of a choice but to wait till January 2002, for the discovery of the NAV. For your first 3000 units, it makes sense to stay put in the fund for sometime, as your downside is protected with assured repurchase price. But don't sleep. Check for the NAV in January. And check again for some dividend in June 2002. If you get some, then it will possibly be the right occasion to exit the fund in July 2002 at Rs 11, even if its NAV is lower.
This week, the credit rating of IDBI bonds and certificates of deposit (CD) was downgraded to AA+ from AAA, for their poor asset quality and reduced spreads. The new rating indicates high safety for these instruments compared to highest safety. However, the highest rating for IDBI's term money bonds and fixed deposits was reaffirmed.
The downgrade of a bond may not have implication if you do not own the bond. But might still be hurt by a rating downgrade if you own a bond fund, which holds the bond in its portfolio. As we reel in a slower economic growth, this might be a pointer to the emerging scenario. When you invest in a bond fund, the greater focus is the return performance of the fund in recent time periods, than an evaluation of its portfolio's credit quality. Its time you check the credit rating of bond fund's portfolio as well, before you invest. For, sparkling returns could very easily be generated on the back of a poor quality portfolio, which may turn sour one fine day. For, all that glitters is not gold!
Fund Update:
For the week ending July 20, 2001, the markets lost 113 points (-3.28%) on the Sensex and 36 points (-2.2%) on BSE National Index. The sole gainer was Boinanza Exclusive (1.73%), while the biggest losers were Magnum Multiplier Plus (-6.62%), JM Basic (-6.59%) and UTI Software (-6.57%).
