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Should your money be in US-64?

Aabhas Pandya

All eyes are set on June 30 again when Unit Trust of India will declare the annual dividend in its flagship scheme Unit Scheme 1964 (US-64). Already the Rs 230-billion US-64 is being partly blamed for the 134-point fall on Wednesday since the fund manager is believed to have booked profits in technology counters for boosting its dividend reserves. Technology stocks had a 23 per cent weightage in the scheme's portfolio as on December 31, 1999. An open-ended balanced fund, US-64 had a 60 per cent exposure to equities on the same date.

This year's dividend pay-out assumes special significance, apart from giving a tax-free return to almost 20 million investors. The equity markets have been good for a large part of this year coupled with US-64's higher allocation to technology and hence, investors can expect a higher pay-out on June 30. Last year, UTI had drastically cut the pay-out in US-64 from 20 per cent to 13.5 per cent after the scheme ran into trouble in 1998 with its reserves turning negative to the tune of Rs 10.98 billion.

Despite suffering heavy losses in its equity exposure, US-64 had continued to pay more than what it was earning by dipping into reserves. However, thanks to the surge in equity markets, the reserves were healthy at Rs 35.8 billion as on December 31, 1999.

Now, the million-dollar question: Apart from the emotional bonding with the 36-year old fund with a chequered dividend history, is US-64 still an attractive investment? US-64 is currently sold and repurchased at a fixed sale and repurchase price on a month-to-month basis though the methodology for arriving at the price is not known. The Deepak Parekh Committee, which was set up to recommend restructuring of US-64, had set a time limit of three years to make the sale and repurchase price of US-64 based on its net asset value (NAV).

While UTI still has another two years at its disposal, did it miss a golden opportunity in the last one year when equity markets were on a roll? Had US-64 gone NAV-based in 1999 or early part of this year, it would have surely boosted investor confidence in the fund since the NAV was propped up by the bull run.

In fact, there were a slew of reports which suggested that the fund's NAV had gained handsomely and estimated the NAV at around Rs 17-levels. If financial reporters can guesstimate the NAV of India's largest fund without any denial from the Trust, it is incomprehensible why UTI could not make US-64 NAV-based if it was indeed at such attractive levels compared to below par-levels in 1998?

Two, the returns from US-64 are paltry, to say the least. For instance, had you invested in July 1999 at the entry price of Rs 13.5 and exited in July this year after taking a tax-free dividend, your one year-return is only 8.14 per cent. This assumes that the exit price in July as same as last year at Rs 13.20 and the dividend for year 2000 is 14 per cent or Rs 1.4 per unit.

Even if US-64 were to declare a 20 per cent dividend, the yield works out to only 12.59 per cent. On the other hand, even the top open-ended debt fund Sundaram Bond Saver has delivered a return of 14.53 per cent for the one year ending May 31, 2000! God forbid, but had you invested in July last year at Rs 13.5 and exited US-64 in June this year at Rs 14.65 without taking your dividend, the return was a measly 6.81 per cent after deducting the capital gains tax of 20 per cent!

Of course, there is absolutely no comparison between returns from other balanced funds and US-64. For instance, US-95, the other open-end balanced fund from UTI, has given a return of over 76 per cent between July 1, 1999 and June 20, 2000. The top performing balanced fund, Magnum Balance has given a return of 125 per cent in the same period.

Returns apart, while US-64 is not NAV-based, even its pricing policy is arbitrary and lacks transparency. As for the dividend, other balanced funds have been paying far hefty tax-free pay-out. Now, does it still make sense to keep your investments in US-64?

BALANCED FUNDS

Fund	Price (Rs) on July 1, 1999	Price (Rs) on June 20, 2000	Change (%)
Alliance '95 (G)	29.65	65.09	119.52
Magnum Balanced	14.69	33.06	125.13
Tata Balanced	13.24	21.37	61.38
Zurich India Prudence (G)	20.23	27.87	37.75
Unit Scheme '95 (G)	189.72	334.16	76.13
US-64*	13.50	14.65	8.52

Fund Strategy

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