After a tumultuous 2001, Unit Trust of India is turning a new leaf with the proposed launch of its maiden open-ended monthly income plan. Importantly, this fund will not guarantee any returns to investors. Christened Regular Income Scheme (RIS), UTI has already filed the offer document for the fund with the Securities and Board of India. When launched, RIS will symbolise a major transition in the Indian fund industry.
For one, it will be curtains for the assured-return era on the Indian fund landscape, which started in early 1990s and gained momentum with a flurry of fixed-return monthly income plans. While Unit Trust of India was the protagonist, closed-end MIPs were also the flavour of the decade for public sector AMCs like LIC and SBI Mutual Funds. Since 1994, UTI launched as many as 26 MIPs with collective mobilisation in excess of 23,500 crore! Normally with a five-year tenure, MIPs typically run a 75-25 allocation to debt and equities.
Two, the oldest mutual fund with a 37-year track record is adapting to change and re-align its strengths in line with the changing markets. So far, fixed-return MIPs have been a perennial source of investments for UTI. However, the Trust finally seems to have realised that guaranteed return closed-end MIPs are not viable. One, the assured return has been on a decline with a steady fall in interest rates. Further, the era of stable interest rates has ended with high-pitched volatility in bond markets. Thus, the last few MIPs have assured returns only for the first year instead of the usual five years.
The previous breed of MIPs has also put UTI in a spot of bother. With a dip in interest rates accompanied by sharp erosion in equity investments, the NAVs for most MIPs are ruling below par (Rs 10). Thus, when these MIPs come up for redemption, UTI will be forced to bridge the gap and return the initial capital. With most of the fall attributed to a rather large equity exposure, the open-end MIP plans to restrict its equity investments at 10 per cent with the rest in bonds for a steady income.
Third, the giant is finally learning a lesson or two from the minnows. So far, most private sector players have drawn on UTI's vast experience to fine-tune their operations. Thus, they have stayed away from the quagmire of assured returns or other such social objectives. In fact, the first open-end MIP was launched by a private sector mutual fund in 1999. Now, it's UTI's turn to adapt to their high servicing standards and better investment management. In fact, it's a challenging task since UTI reaches to investors like no other mutual fund with presence in every nook and corner of the country.
Once launched, Regular Income Scheme will mean that the last "specialty" bastion at UTI has been razed to the ground and brought it on par with other AMCs. Already, US-64 has lost its charm with investors. All these years, UTI delivered returns that were insulated from the vagaries of the markets but has brought it on the brink of disaster.
The launch of the new generation -- non-guaranteed open-end MIP reflects a small but a significant step forward in the changed times.