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MIP Debacle

A 44 per cent fall in the dividend payouts from two of the MIP series of UTI, makes the bank deposits look more attractive. Their below par NAVs is another dampener.

Don't be surprised if the monthly cheque from UTI's MIP '95 and MIP '96 (IV) carries a dividend of only 0.042 paise per unit, cumulating to a paltry five per cent this year! The income distribution in the two funds has been slashed by 400 basis points, which was pegged at 9% and 9.25%, respectively in 2000. On the other hand, there has been no change in the key bank rate (at 7%) in the last one-year, which is the trendsetter for the overall interest rates in the economy. Thus, the sharp dip clearly indicates the mismanagement of the funds.

Unit Trust of India has also earned the dubious distinction of slashing returns below the interest on one-year bank fixed deposit. For instance, State Bank of India offers a 7% return on its one-year FD, a good 200 basis points above the dividend income in UTI's MIPs. Worse, the dividend of 5% is just a shade better than interest earned on banks' saving accounts. So much so for active fund management!

While MIP '96 (IV) will be redeemed this year, MIP '95 is due to end its term in June 2002. The two funds assured dividend payouts for the first year and income distribution for subsequent years, announced at the beginning of every fiscal, is linked to the interest rate outlook.

With 80% allocation to debt, both funds were able to lock their assets in high-yielding bonds. However, the 20% investment in equities has proved to be the funds' Achilles' Heel. The sharp volatility here has significantly impaired the reserves for UTI's MIPs, forcing them to drastically cut dividend payouts. For instance, MIP '96 (IV) started off with a dividend of 15% in 1997, which was reduced to 13% next year. It dropped another 2.25% in 1999-2000 to 10.75%. In other words, your earning from 1,000 units in MIP '96 (IV) has eroded from Rs 1500 in 1997 to only Rs 500 for the current year. Further, it is not even sufficient to beat inflation, resulting in negative real returns.

The latest available portfolio (for February 2001) reveals that the top equity holdings of the two funds include bluechip stocks like Infosys, ITC, Reliance and Satyam. The top debt holdings also belong to mostly fundamentally sound companies. Yet, the duo suffers from the typical UTI problem of a thinly spread portfolio with as many as 134 holdings in MIP '96 (IV).

With below par NAVs for both funds, investors have no option but to stay invested till redemption since exit now would only mean incurring a loss. On the other hand, with the base capital assured, investors can at least get back their initial investment on redemption. Further, with quality equity holdings, the funds hold a potential to revive in the event of a sustained rally. There is another dampener - UTI charges an exit load in both the funds, the slipshod management notwithstanding. For instance, while the NAV of MIP '96 (V) is Rs 8.80, investors will get back only Rs 8.54 per unit.

While investors in the two MIPs have earned a paltry return, they should refrain from investing in the future series of UTI's MIPs, which have a similar structure. The meagre 5% dividend has surely come as a setback to scores of investors, who trust the mutual fund behemoth with their life's savings. Well, there is no guarantee that investors will not get the shock again!

Despite poor returns and heavy losses in 2000, funds ended last year with gross sales of Rs 92,000 crore. But, this is just one part of the story

Dropping Dividends
  Year  MIP '95  MIP '96 (IV)
  1996-97 13 -
  1997-98 14 15
  1998-99 12.5 13
  1999-00 NA 10.75
  2000-01 9 9.35
  2001-02 5 5
* Dividends in %