The US-64 scheme - stay with it

By C. R. L. Narasimhan

On August 1, the Unit Trust of India will open the repurchase window for the smaller of the US-64 investors. What should the investors do? Given below are some factual observations that should help in deciding.

The US-64 scheme, which is at the centre of the crisis that has engulfed UTI, has not fared worse than many other mutual fund schemes over a comparable period of the past one year. According to available data, there has been a steep erosion in the net asset values (NAVs) of several other mutual fund schemes irrespective of the fund managers.

Pushed down by an erratic stock market, each one of the schemes that thrived on the short-lived technology stock boom has disappointed investors. Some more than others. What is especially striking is that widely acclaimed schemes such as the Alliance 1995 and the Birla Balance have seen their NAVs fall - by more than 29 per cent in the case of the former and by a whopping 34 per cent in the case of the latter.

Both incidentally are balanced schemes which means that at least a part of their corpus would be deployed in less risky debt instruments. Even so, the crash in the equity market has been such as to drag them down. Another of Alliance's popular schemes - its regular income scheme - missed out on a monthly return because even its small investment in equities proved disastrous.

What is the relevance of all this for the US-64 investors? That the US 64 has not fared worse ought to be some consolation. True, there are some inherent difficulties in categorising the US-64 into conventional moulds such as an income fund, growth fund or balanced fund. Right from inception, the scheme has had a kind of asymmetry - between its objectives (a regular and steady return) and its investment patterns (predominantly in equities). Admittedly, the scheme's structure is flawed. The Deepak Parekh Committee, among others, had strongly recommended a shift away from equities into fixed income instruments.

Another difficulty has been in determining the extent of erosion in the US-64 NAVs. Most analysts base their estimates on the difference between last July's repurchase price of Rs. 13.50 - said to represent the NAV - and what the investor will get now. The latter again is difficult to calculate. The scheme shifts into the NAV mode in January next. Meanwhile, small investors have an exit option from August 1 - the Trust will buy back up to 3,000 units in each case at a price of Rs. 10. (The repurchase price will go up by 10 paise each month till July 2003). So, for the sake of comparison, the US-64 has eroded by 25 per cent. The saving grace is it has paid a 10 per cent dividend.

The investor can do much better by sticking to the scheme. The exit route announced - allowing for encashment of upto 3,000 units - is a confidence inspiring measure more than anything else. While the UTI management has ensured liquidity back up, analysts are also saying that with the restructuring now underway, the US-64 will remain solvent and liquid in the days to come. In any case there is no need to panic and withdraw from the scheme in a way that will cause a run. No financial institution, however mighty, can withstand a run. The US-64, for all its current problems is not a failed scheme and can be nursed back to normality.

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