The 44-year long story of US64 is finally coming to an end. The tax-free bonds that the government issued back in 2003 now stand to be redeemed. These bonds were created out of the debris of the old Unit Trust of India. At that time, US64 unit-holders were given the choice of either taking Rs 10 per unit or taking up these tax-free bonds. The bondholders earn 6.75 per cent a year, which has compounded to a total gain of Rs 38 for every hundred rupees invested. In many ways, it is a sorry end to what was, effectively, India's first mutual fund. While the details of how US64 was mismanaged to the ground are too long and tedious to be repeated here, the bondholders do have an important decision to make now. They have to decide what to do with the money that they will be getting on redemption. Obviously, each bondholder would have unique financial circumstances and will have to take a decision based on that. However, there are a few common threads.
Most US64 holders are financially conservative. Many of them are either close to retirement or have retired in the five years since the bonds were issued. Based on what I've observed among the people I have interacted with, bond-holders can be divided into three categories-those who need the money right away, those who need a regular income out of this money, and finally, those who need to invest it for future capital gains. The fact that we are focused more on safety than on hot returns makes the choice reasonably simple.
If income is your requirement than a MIP (monthly income plan) mutual fund is your best bet. These are funds that invest a majority of investors' holdings (75-95%) in conservative fixed income options. The remainder is put in equity in order to provide returns that are somewhat above what a plain deposit would yield. These funds generally issue a monthly dividend, thus fulfilling investors' need for a monthly income.
For those looking for capital gains and are willing to invest over a longer time period-at least three to five years, balanced funds are a better choice. These generally invest about half their corpus in equities and thus offer higher returns than MIPs but lower risk than all-equity funds.
However, make no mistake-both these types of funds have investments in equities and are thus exposed to a certain amount of market risk. The risk is particularly small in case of MIPs, but it's there. That's the price that has to be paid for the extra returns that these funds are capable of. If you are willing to forego that in order to get as close to risk-free as possible, then traditional investments like Post Office deposits, RBI Bonds and the Senior Citizens Deposit Scheme are better choices. There are a number of well-run MIPs and balanced funds available from various fund houses. Performance comparisons and ratings are available on our site.
That is as far as investment goes. However, I do think that US64 investors have ended up with a raw deal. Over the last five years, their returns have been a pittance compared to what they could have earned even if US64 been run as a below-average balanced fund. And while the entire sorry saga has always been presented by the government as a rescue of some kind, the fact is that the investors have done poorly out of the government's mismanagement of the erstwhile Unit Trust. These investors were the victims of the incompetence and malfeasance of managers who were appointed by the government and who were responsible to the government. But all that is in the past. There's nothing to do now but put the past down to experience and look to preserve whatever one has.