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Unit '64 and Sobering Returns

The action plan for your US-64 holding as we approach the limited redemption offer and the outlook for debt funds as returns begin to taper off and concern about credit quality rules high

From August 1, 2001, you can avail the limited repurchase offered by UTI for your holdings of US-64. At Rs 10 a unit for your first 3000 units in every unit holding account. And for the remaining holdings, you can either sell in the market or wait till January 1, 2002.

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 2002 or NAV whichever is higher.

For the remaining holdings, NAV based price will be applicable. And it could be any amount. 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.

Debt Fund Outlook
The pace of return from debt fund has slowed down in recent weeks with declining hopes of an interest rate cut. While bond prices are still rising, but not as sharply. Since bond prices and interest rates move in opposite direction, the current year has been phenomenal for bond fund investors with a successive interest rate cuts. Despite the recent slackening, the average return of the Value Research category of medium-term debt funds is 8.21 per cent for the 6-months period ending July 27.

But you can still negotiate a steady return from a debt fund, barring an external rigger like oil price hike or pressure on the rupee. Of course, you will do well to discount the recent performance as an extraordinary rewarding period for debt funds and re-align your expectations. The preliminary symptoms are already visible. Past week the average medium-term debt gained only .13 per cent against .55 percent a month ago. This deceleration in gain will gradually reflect in overall returns, and the consensus 1-year return estimate from medium-term debt fund is in the range of 9-10 per cent. Thus, investors should quickly forget the past performance.

Besides slowing numbers, the issue of credit quality has again come under sharp focus. Credit quality simply means the ability of the company to pay back money to its investors. Recently, term-lending major IDBI was downgraded from AAA to AA+. Even this downgrade from highest to high safety impacted the sentiment and pulled down the NAVs. Similarly, Tata Finance has been put under rating watch. In a deteriorating economy, you should get little careful about a debt portfolio's credit quality and make sure that the fund manager is not taking undue risk to generate returns. Invest only if you are comfortable with the credit quality of your fund's portfolio! While all lower rated bonds are not necessarily poor quality investments, fund managers also have to exercise extra caution and manage these holdings dexterously.

On the whole, debt funds are still the best-suited vehicle for the fixed-return investor for the standard benefits they offer -- the diversification, high-liquidity, convenience and tax efficiency.

Fund Update
For the week ending July 27, 2001, the markets lost 89.2 (-2.67%) on the Sensex and 50 points (-3.18%) on BSE National Index. The sole gainer was Kothari Pioneer FMCG (0.09%), while the biggest losers were Birla IT (-8.19%), Alliance New Millenium (-8.07%) and UTI Software (-8.05%).