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It's a Hobson's Choice for UTI

The pricing policy for US-64, as it approaches deadline for going NAV-based, will be crucial for its survival

Come June, US-64 is the pivot of all discussions as investors speculate on the quantum of dividend. Yet, this year is going to be different for the mutual fund behemoth. US-64 will have to go NAV-based by February 2002 as sales and repurchase prices are linked to the prevailing NAV. So far, UTI has followed an arbitrary pricing policy where the price for US-64 units is at its lowest in July after the dividend and inches up to peak in May next year. For instance, the sale price was pegged at Rs 13.50 in July last year and rose through the months to Rs 14.55. On the other hand, the repurchase price went up from Rs 13.20 to Rs 14.25.

So, what is the likely pricing structure for US-64 this year, after it declares dividend? The most talked about scenario is UTI gradually pulling down its sale and repurchase price to re-align with the underlying NAV. This will be contrary to the traditional trend. For instance, if the average NAV is at Rs 10 till February, sale and repurchase prices will be steadily brought down to the NAV level in the coming months. Of course, the cut in sale and repurchase price could vary, if the NAV props up or goes down further.

This partly explains the rush of redemption in May, especially from big-ticket investors. Investors have been pulling out in anticipation of poor dividend coupled with the likely absence of the option to exit at a successively higher repurchase price.

However, the staged reduction in pricing could prove detrimental to UTI's interests. This could create a panic among remaining investors, who could press the redemption button and wreck havoc with US-64.

The other possibility, and a rational one, is that UTI sticks to the current pricing strategy and then slashes the sale and repurchase prices in one go to take it to the ruling NAV. While this will be detrimental for the interests of investors, it will ensure that the Trust is not faced with a sustained redemption pressure. Thus, if investors plan to exit, they will have to redeem at a sharply lower repurchase price.

It's surely a Hobson's choice for UTI's mandarins - they can either be a socially responsible mutual fund and face redemption in their flagship or act business-like and save their asset base.