Personal Finance: A US-64 Catechism

PERSONAL FINANCE: MUTUAL FUNDS
A US-64 Catechism

Kintu Kher, a primary school teacher worried about poor US-64 returns, turns to the financial whiz -'Pennywise' Prabhu.

By Roshni Jayakar

Kintu Kher is confused. A primary school teacher, she had purchased 1,000 units of US-64 in July, 1999, at Rs 13.50 per unit. On July 3, 2000, when the UTI's Chairman, P.S. Subramanyam announced a dividend of Rs 1.375 per unit (face value: Rs 10), she received Rs 1,375-an yield of 10.185 per cent on her original investment of Rs 1,350.

Kintu considers selling the units at the July, 2000, repurchase price of Rs 13.20 per unit. A simple back-of-the-envelope calculation tells her that her income per unit would work out to Rs 1.075 (Rs 1.375 as dividend, less than the Rs 30 drop since she bought the unit)-a return of 7.96 per cent.

Kintu realises that were she to sell out now, her effective rate of return over a two-year period would be 6.97 per cent.

Why, she wonders, does she have to be satisfied with single-digit returns when every other fund is offering huge returns. She consults 'Pennywise' Prabhu, who is a manager at the Evergreen Investment Advisory. An excerpt from their conversation:

Kintu: How do the US-64 returns compare with other schemes?

Pennywise: The returns on US-64 are insignificant compared to those of some private fund schemes. Let's look at other balanced funds. In the last year, Magnum Balanced gave a return of 104.34 per cent, Alliance 95, 102 .16 per cent, Tata Balanced, 52.20 per cent, and Zurich India Prudence, 34 per cent. To quote J. Rajgopal, Director, Blue-chip Investment: ''Not many retail investors have shown interest in US-64 in July.'' And since dividend income from mutual fund schemes is tax-free, there is no particular advantage that is be gained from holding these US-64 units.

Kintu: How does US-64 compare with other fixed-income options?

Pennywise: The only other tax-free option that can be compared with US-64 is the 9 per cent tax-free relief bonds. If you were to buy these bonds in the secondary market, you could get a tax-free yield of 9.5-9.6 per cent, which is 1.54 per cent higher than the current yield on US-64. Even if you were to look at other fixed-income instruments, US-64 does not come up trumps. Let me give you a sampling. The PPF scheme gives an yield of 11-15 per cent, if you look at it over seven years. The NSE scheme gives a return of 11 per cent, which goes up to 15 per cent over seven years, and the Post Office Monthly Income Scheme gives a return of 11 per cent, plus a maturity bonus which tots up to 12.66 per cent over six years.

Kintu: But what about reports that US-64 is much stronger than it was a year ago?

Pennywise: US-64 is financially much stronger today than it was, say, a year ago. It recorded a positive net sales of Rs 2,387 crore as against negative net sales of Rs 3,131 crore in the previous year. And the income distribution or dividend is being paid entirely out of the estimated net income of Rs 2,597 crore earned during the year, which works out to more than 17.17 per cent earnings on the unit capital.

What's more, the nearly Rs 24,000-crore portfolio has been modified with equity now accounting for 68 per cent of it against 72 per cent last year. The rest is debt. As the company's Chairman, P.S. Subramanyam has been heard to say: ''It's a dynamically balanced scheme.'' That gives some flexibility to the fund manager. The composition of the portfolio too has changed. For instance, the exposure to software stocks, which have appreciated 16.23 per cent over the last year, has increased from 5.27 per cent in June, 1999, to 21.5 per cent now. Similarly, cyclicals form 10.08 per cent of the portfolio now against 15.63 per cent in June, 1999. Despite this, US-64 is not likely to show much of an improvement. After all, even though the stock markets went up by over 1,000 points this year, the increase in dividend on US-64 has been marginal. There is need for greater transparency on the UTI's part when it comes to its portfolio.

Kintu: What about the NAV? I am concerned that the UTI still does not declare it?

Pennywise: The UTI chairman has announced that the scheme would move towards NAV-driven pricing before the deadline of February, 2001, the recommendations of the Deepak Parekh committee.

Kintu: I am still confused. What is the bottomline: should I sell or hold US-64?

Pennywise: If you are willing to take a little risk, I suggest you switch to other schemes after checking out their track records and portfolios. Perhaps, when the NAV of US-64 is announced, you could buy it again. After all, it is open-ended.

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