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Life Beyond US 64

It's a tale of two funds-- US 64 and US 2002, they are so similar and yet different. Similar in what stocks and bonds they own, but different in their performance. Read ahead to know what US 2002 looks like.

Unit Scheme 64 (US 64) now has a successor, which will live on while the older scheme withers away. Called Unit Scheme 2002 (US 2002), it already has Rs 602.71 crore worth of assets under management as on January 31, 2003, making it the third-largest open-end balanced fund even though it is just more than five per cent of the size of the largest, which is obviously US 64 itself. US 2002's genesis is unusual among funds. It has been carved out from US 64 by clubbing together assets that flowed in after July 31, 2001, either as fresh investments or through reinvestment of dividends. On its November 15 launch, it had an NAV of Rs 5.59, three paise lower than US 64's NAV that day.

Given that the two funds have near identical portfolios, their NAV movements in the weeks since US 2002's launch present a curiosity: US 64 is clearly more volatile of the two. While some of the difference may be explained by the small differences in the portfolios, the real reason is that US 64 is effectively a leveraged fund, i.e., part of its investments are financed by borrowings.

How this happened is an interesting story. These borrowings were made in anticipation of huge redemptions at the time when US 64's first NAV was declared in January 2001. However, these redemptions did not actually take place as the special repurchase package offered by the scheme was attractive enough to hold investors' interest. Thus, of US 64's total asset base of Rs 10,793 crore as on December 31, 2002, Rs 6,646 crore was unitholders' investment, while the balance Rs 4,146 crore was borrowings.

Since these borrowings too are invested in stocks, US 64's NAV rises and falls disproportionately depending on whether the portfolio gains by more or less than the interest rate that UTI is paying on the borrowings.

Coming back to US 2002, on January 31, 2003, it had around 45 per cent of its assets in equity and 47 per cent in debt instruments, with the balance in cash. Currently, US 2002 has 70 stocks in its kitty, which it hopes to reduce to 60 in the future.

On the debt side too, things look good since none of non-performing assets of US 64 have been transferred to the new scheme. US 2002's debt portfolio comprises of just 27 debt instruments as against 177 in US 64.

All in all, US 2002 is a variant of US 64 minus the bad things. With a largely blue-chip portfolio, US 2002, if managed properly, is fully capable of giving its peers stiff competition.