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Unit Scheme 64, A Sob Story

By Dhirendra Kumar

When the boom hits the stockmarkets, the Unit Trust Of India (UTI) starts beaming. Last fortnight, when the country's oldest mutual fund company declared a dividend of just 13.50 per cent for 1998-99-7.50 per cent down from the 20 per cent it had announced in each of the last 3 years-it only confirmed the investor's suspicion that things would never be the same again for Unit Scheme 64.

Implying a yield of 10 per cent per annum on the July, 1999, sale-price of Rs 13.50 per unit, the repurchase-price of the scheme now stands at Rs 13.20. Although the yield, traditionally based on the post-dividend July quote, has been consistently declining since 1992, this is the lowest ever generated by an investment in Unit Scheme 64. Unfortunately for the investor, it may not get any better in future either.

With its equity-to-debt allocation standing at 2:1 today, the performance of Unit Scheme 64 will depend only on the behaviour of the stockmarket tomorrow-and not interest rates. So, if the stockmarkets continue to boom all through to July, 2000-last fortnight, crossing the all-time high of 4,643.31 it touched on September 12, 1994, the Bombay Stock Exchange Sensitivity Index (Sensex) soared to 4,678 on Terrific Tuesday, July 13, 1999, although it closed the day at 4,615-Unit Scheme 64 will be able to return to the era of 20 per cent dividends.

But if, in the aftermath of Elections 99, the Sensex doesn't shoot, the UTI will continue to have a problem in its coffers. That's why, based on its asset-allocation, it is unreasonable to expect a sustained rise in income from the scheme as was the case in the past. Not only is the annual yield of 10 per cent unattractive to the investor, the level of returns is simply not adequate given the risks of the equity-allocation in Unit Scheme 64's portfolio.

What is, perhaps, more important is that the UTI has officially stated that it will implement, over the next 3 years, the recommendations made by the Deepak Parekh Committee. This means, among others, two things to me. One, that Unit Scheme 64 will be made Net Asset Value (NAV)-based. Two, the scheme's asset-allocation will be re-oriented towards debt.

These are significant changes that will require amendments to the UTI Act, 1964.For instance, the scheme's investments in real estate will have to be transferred to a Development Reserve Fund, and the term-loans it has extended will have to be recalled to make it competitive in a NAV-based market. So, the investor will have to factor in volatile repurchase-prices and sale-prices into his strategy.

That Unit Scheme 64 will undergo a transformation is obvious since it has lost its main attractions: rising repurchase- and selling-prices throughout the year, and a handsome dividend yield every year. But is the scheme strong enough to survive? Watch this space.


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