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Honey, I Shrunk the Dividend

UTI-I has announced very low dividends for its closed-end MIPs. But a low dividend should not bother investors as the capital is guaranteed at the time of redemption

Most investors would have been distressed on hearing the news that UTI-I had decided to declare a lower dividend for its closed-end MIPs for the period April 1, 2003 to March 31, 2004 (see UTI Monthly Income Plans: At a Glance). Barring MIP 2000, the dividend announced for other MIP schemes is even lower than what was given out last year. However, looking at the net asset value (NAV) of these schemes (which are languishing at below par), one should be pleased with the dividend amount. Had UTI-I been under the purview of the market regulator, the Securities & Exchange Board of India, these schemes could not have declared any dividend because as per SEBI guidelines, funds have to pay dividend out of the accrued income and this means NAV above par.

UTI Monthly Income Plans: At a Glance
  Fund  NAV (Rs)  Assured at  Maturity  Dividend (%)            
    16/06/2003  Maturity (Rs)  Date  2002-03  2003-04          
 MIP 99 (II) - DY 7.9364 10 Oct-04 5.12 3.04     
 MIP 2000 - DY 6.8980 10 Jan-05 3.04 3.04     
 MIP 2000 (II) - DY 7.8471 10 Jun-05 5.12 4.07     
 MIP 2000 (III) - DY 8.5429 10 Oct-05 5.12 4.07     
 MIP 2001 - DY 9.4305 10 Feb-06 6.17 5.12     
Both low dividend and low NAVs should not bother you as your capital is protected, which will be returned to you at the time of maturity by the UTI's Development Reserve Fund (DRF). Although last year UTI removed both the lock-in and the exit load for MIPs, don't react in haste now. At this juncture, staying invested here makes much more sense. For instance, MIP 99 (II), which will mature one-and-a-half years from now, will fetch you Rs 10 per unit on maturity. On the other hand, exiting the scheme right now will mean a huge opportunity loss as the current NAV of MIP 99 (II)-DY is under Rs 8—almost down 20 per cent. The same logic works for other MIPs as well, except for MIP 2001, where the capital loss is minimal.

However, there is one discrepancy that you cannot overlook. Both cumulative and dividend plans will be redeemed at Rs 10 or NAV, whichever is higher at maturity. Thus, an investor who has opted for cumulative option would be regretting not choosing the dividend plan. But that's in hindsight. The bottomline clearly is that low dividend doesn't mean much for an investor as protection of capital is assured here.