VR Logo

UTI MIP shortfall at a staggering Rs 2368 crore

If US-64 is the fund behemoth's Achilles' Heel, the assured monthly income plans (MIPs) may well be the proverbial albatross. While the liability is huge on current NAV, it is not to be paid by UTI right now but will become due once MIPs start to mature from early 2002

The Unit Trust of India's cup of woes is overflowing. If US-64 is the fund behemoth's Achilles' Heel, the assured monthly income plans (MIPs) may well be the proverbial albatross. At least ten MIPs from UTI will come up for redemption in the next three years with the last in the tranche maturing in August 2004. With their net asset values hovering below par, the cumulative shortfall as on June 30, 2001 is a whopping Rs 2368 crore!

The MIP Conundrum
Fund  Total shortfall**
MIP '97 (I) 371.96
MIP '97 (II) 438.25
MIP '97 (III) 194.87
MIP '97 (IV) 156.45
MIP '97 (V) 102.43
MIP '98 170.60
MIP 98 (II) 179.03
MIP '98 (III) 269.70
MIP '98 (IV) 111.25
MIP '98 (V) 134.74
MIP '99 239.16

However, this money is not to be paid by UTI right now but will become due once MIPs start to mature from early 2002. And depending on the markets, the shortfall from current levels could either increase or come down. On the other hand, the size of the Development Reserve Fund, which assures returns in MIPs was only Rs 1070 crore on June 30, 2000. The combined unit capital under the 11 monthly income plans is a humungous Rs 13,636 crore and have assured returns for the entire tenure of five years.

Dividend Option
Fund   Assurance  U/C '  Exp NAV *  Actual NAV*  Shortfall**
MIP '97 (I) 14.00% 1325.80 10.00 7.49 332.78
MIP '97 (II) 14.00% 1742.12 10.00 7.89 367.59
MIP '97 (III) 13.00% 923.82 10.00 8.12 173.68
MIP '97 (IV) 12.50% 1018.76 10.00 8.70 132.44
MIP '97 (V) 11.75% 506.28 10.00 8.05 98.72
MIP '98 12.50% 1019.55 10.00 8.41 162.11
MIP 98 (II) 12.50% 908.80 10.00 8.03 179.03
MIP '98 (III) 12.50% 1379.68 10.00 8.11 260.76
MIP '98 (IV) 12.50% 906.66 10.00 8.82 106.99
MIP '98 (V) 12.50% 886.56 10.00 8.54 129.44
MIP '99 10.75% 2741.82 10.00 9.16 230.31

While UTI has been paying dividends under MIPs by dipping into their unit capital, the gap will emerge on redemption since the Trust also guarantees the initial investment. Take for instance, MIP 97(I), which is due for redemption in April next year. The fund already faces a combined shortfall of Rs 372 crore under its dividend and cumulative options on June 30, 2001. While fund's NAV under the cumulative option should have been Rs 18 (cumulating initial investment at the assured return of 14.93%), it was actually a paltry Rs 8.42 on June 30, 2001 and translates into a huge gap of Rs 9.6 per unit. On the other hand, the monthly option's NAV is at Rs 7.49 against the minimum value of Rs 10, due on redemption.

Cumulative Option
Fund   Assurance  U/C '  Exp NAV *  Actual NAV*  Shortfall**
MIP '97 (I) 14.93% 40.75 18.04 8.42 39.18
MIP '97 (II) 14.93% 83.45 17.61 9.14 70.66
MIP '97 (III) 13.80% 27.78 16.58 8.95 21.19
MIP '97 (IV) 13.24% 38.01 15.81 9.49 24.01
MIP '97 (V) 12.40% 5.78 15.05 8.65 3.70
MIP '98 13.24% 13.80 15.08 8.92 8.50
MIP 98 (II) 13.25% - - - -
MIP '98 (III) 13.25% 16.37 14.28 8.82 8.94
MIP '98 (IV) 13.25% 9.30 13.88 9.3 4.26
MIP '98 (V) 13.25% 12.24 13.50 9.17 5.30
MIP '99 11.30% 28.76 12.54 9.47 8.84
" ' In Rs Cr. As on June 30, 2000"
" * In Rs. As on June 30, 2001 "
" ** In Rs. Cr. As on June 30, 2001 "

The Problem
While UTI may pin hopes on a revival in the equity markets for a bail out, it needs a miracle now to trigger a turnaround. With the first MIP due for redemption in less than a year, there is little time left for perking up the fortune of the beleaguered MIP family. The disconcerting loss is again a reflection of the conflict between MIPs' objective and investment strategy. While UTI aims at providing regular income to investors, it invests 20-25 per cent of the assets in equities! Given the sharp volatility in equities, even a small loss can wipe off the interest income earned from an 80 per cent allocation to debt instruments. In some MIPs, UTI has attempted to recoup losses by further hiking its exposure to equities. Needless to say, it has got the Trust into a quagmire with still sharper fall in assets.

Further, while some MIPs in 1997 and 1998 assured a coupon ranging from 13-14 per cent, the sharp fall in interest rates has only added to their agony. The inability of some companies to pay up interest income amidst a deteriorating economy has led to non-performing assets. Says UTI's executive director, B G Daga, "we are currently making tight provisions for NPAs, which is pulling down the NAV. However, most of them will be recovered by the time of redemption. Any gap beyond this will be met from the DRF, which has adequate resources."

Clearly, yesterday's money-spinners for UTI have today become an albatross. With a yawning gap staring in its face, tough time lies ahead for the fund house. While fixed-return schemes are now a passe, the promises of the past continue to haunt the Trust's future.

Click here for Methodolgy