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UTI - Investor's Action Plan

As UTI undergoes a profound change while combating problems of legacy, here's the action plan for the existing and prospective investors of UTI.

1. Is the decision a wise one from the point of view of the government? Or is it one of those compulsions where no one still knows if there's light at the end of the tunnel?

A wise decision because the government was anyway honoring all the commitments made by UTI. This will save individual investors from the anxiety. Besides government is compelled to do so for a variety of reasons -- political and socio-economic as well. Ducking on a promise will amount to total confidence erosion in the financial system.

Besides, the due redemption data of US-64 was eight months away, much closer to the parliamentary elections. Based on earlier experience in July 2001, the government has a reasonable feel of the fallout when the redemption in US-64 was frozen.

2. As an investor in existing UTI schemes, does it really matter to me if my money is now with UTI-I? Should I now say `enough is enough' and mop my funds and bid good bye to UTI?

No. Stay put and consider the most profitable way out now from these funds. Broadly, UTI-1 is in two parts - US-64 and MIPs.

For US-64: With government's bailout, of a guaranteed repurchase price, the action plan for an investor is rather straightforward. As its sates that all commitments would be extended beyond May 2003. This implies that government will assure return for the future tenure of US-64 and will also give a tax sop to investors.

Investors holding 5,000 units or less: For unit holdings up to 5,000 units, it makes sense to stay put in the fund for sometime, as your downside is protected with assured repurchase price. You can sell only 5,000 units back to UTI at Rs 11.20 in September 2002. This price is revised by 10 paisa every month till May 2003, when its final repurchase price will be Rs 12.

Investors holding more than 5,000 units: For holdings above 5,000 units, you can still take a chance. For these units will be redeemed at an assured price of Rs 10 in May 2003. But don't sleep! Keep a close eye at the NAV. Until that time if the NAV crosses Rs 10 -- then it would make sense to take a call on the opportunity. Looks unlikely based on portfolio performance alone as the fund would need to generate a whopping 69% return from the current level of Rs 5.92 to reach its par value. Unless ofcourse the fund gets the difference between the NAV and the assured prices before May 2003.

For MIPs: Today, broadly there are two kinds of MIPs -- one which guarantee capital protection and return for the entire tenure and the one which guarantee capital protection and revise the returns every year. So in most cases you will be better off by staying with the fund till redemption. Panic exit won't help because if you exit now, it will be at NAV will is substantially less than their face value. With the bailout, you are saved from the anxiety through you stay in these funds till redemption.

3. What's in it for me in UTI-II? As a government scheme, which will eventually be privatised, what is it value proposition vis-a-vis other private funds?
UTI - II consists of new generation open-end or closed funds without any baggage. There is a hope as it's a banquet of good and bad performers like any other AMC. And the UTI management can focus on fund management than managing crisis.

4. If I were ITC or any other the hundreds of corporates in which UTI is an investor, is the split a good idea or a bad one?
UTI could be loser in terms of bargaining power to realise higher value for its strategic holdings in companies. Both UTI can work together to their mutual benefit for strategic sales.

5. Please equip me with information that will help me take a more informed decision. As an investor what are the strengths, weaknesses, opportunities and threats I should know of in between the lines?
UTI – I is government. So live with it till you have to. UTI - II looks a reasonable fund family with all key products, a superior economy of scale, now with the management focus as well, the widest reach through the country and massive investor servicing infrastructure. Soon, UTI-II funds can well qualify as a reasonable vehicle if they state a clearly charted course ahead in terms of portfolio focus.