Is Unit Trust of India sinking deeper into the MIP quagmire?
All the five Monthly Income Plans of UTI launched in 1997 are only a year away from redemption but the NAV of the cumulative and monthly options are below par. It is no different for the 1998 series, where another five funds have sub-par NAVs. With the returns guaranteed for the entire tenure in these MIPs, UTI fund managers surely have a Herculean task on their hands. For, the UTI owns an ill-equipped Development Reserve Fund (DRF), which guarantees returns in MIPs on the back of an asset base of Rs 1200 crore. On the other hand, the ten funds of 1997 and 1998 had a combined corpus of Rs 9670 crore on February 28, 2001.
However, UTI's executive director, B G Daga is confident that shortfalls, if any, will be met from the DRF and the Trust will honour its promised returns. "We are currently making tight provisions for NPAs, which is pulling down the NAV. However, most of them will be recovered by the time of redemption. Any gap beyond this will be met from the DRF, which has adequate resources."
Well, whether UTI recovers its sunk money is a matter of time. Given the current gap between the NAV and assured returns, it is the cumulative options of the funds, which especially pose a serious threat. Consider Monthly Income Plan 1997 (II), which assured an annualised 14.93% for all the five years. The offer document says that returns will be "cumulated" at the assured rate of 14.93% per annum such that Rs 2,000 invested under the option will become at least Rs 4012 on redemption. In other words, the NAV should be at least Rs 20.06. While the fund is just over a year away from redemption, the cumulative option is currently at Rs 8.95. Thus, investments under the plan have to grow at an annualised 98%, a near impossible task, given the state of the markets and a cap of 20% on fund's exposure to equities. The sub-par NAV reflects that not only has the Trust been unable to reinvest any dividend, it has also lost a part of the initial capital. It's a sad state of affairs under the monthly option too, where the NAV is at Rs 7.75 - a gap of Rs 2.25 per unit.
It is not possible to arrive at the precise loss since the breakup of unit capital under the two options is not known. While most investors do not opt for the cumulative plan, where the shortfall is particularly alarming, the collective toll could still be high since NAVs are below par for both the options.
However, we still attempted at arriving at the likely gap in MIP '97 (II), based on the assumption that 90% of the unit capital is locked in the monthly option while a conservative 10% is invested in the cumulative plan. This translates into a current shortfall of Rs 572 crore, given the fund's unit capital of Rs 1825 crore in June 2000.
Clearly, yesterday's money-spinners for UTI have today become an albatross. With a yawning gap staring in its face, tough time lies ahead for the fund house and only efforts on a war footing can resurrect the beleaguered schemes. While fixed-return schemes are now a passe, the promises of the past continue to haunt the Trust.