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Unit Scheme-1964

Dhirendra Kumar

Unit Scheme-1964 is an open-ended balanced fund. Launched in 1964, it is the oldest fund today and commands a whopping size of Rs 18749 crore as on October 2000. Entry and exit out of the fund is carried out on the repurchase and resale prices declared at the beginning of every month. The repurchase and resale price has been set at Rs 14.25 and Rs 14.55 respectively for May. The fund has announced book closure between June 1 and July 2.

FUND BASICS   Objective    Unit Capital (Dec '00) (cr.)    Repurchase (May 2001)    Resale (May 2001)   Balanced   15,993   14.25   14.55

The annual dividend from the fund is a much awaited event. For the fund holds an enviable and uninterrupted dividend track record for the last 36 years. In its initial years, the fund maintained this dividend payout on the back of a debt-oriented portfolio. Even while the fund hiked its dividend payout, it came with a shift in the portfolio stance in favour of equity. While this served the fund well during a rise in the equity markets, the troubles started when the equity markets turned volatile. However, the fund sought to continue to pay high dividends by dipping in to its unit capital. The fact that it was unregulated and the belief that the government would eventually come to its rescue seems to have only helped its complacence. This inability to realign with the changed times and re-scale investors expectation with the reality of its performance has been its Achilles heel.

However, investors could actually be in for a disappointment this year. Given the abysmal state of the equity markets and US-64's stretched equity stance, the dividend this year is going to be anything but spectacular. UTI might find it difficult to even maintain its 2000 dividend of 13.75 per cent. The reasons are not hard to find. For one, its dividend distribution policy has been now thoroughly revamped to ensure that the scheme is responsive to changing market conditions in line with the Deepak Parekh Committee recommendations. As a rule, the dividend needs to be curtailed when there is inadequate income. Thus, net income becomes critical for unlike in the past, the fund cannot dip into its capital to pay dividend.

Date  Dividend  Rights/Bonus      (%)       30-Jun-91   19.50     30-Jun-92   25.00     30-Jun-93   26.00   Pref Offer @ 11.20 (July 1992)   30-Jun-94   26.00   2:5 Rights @ 12.80(July 1993)   30-Jun-95   26.00   1:5 Rights @ 14.80 (Sept 1994)   30-Jun-96   20.00   1:10 Bonus Issue   30-Jun-97   20.00     30-Jun-98   20.00     30-Jun-99   13.50     30-Jun-00   13.75

Commendably, for a balanced fund which held over 70 per cent in equities in June 2000, the fund has reported a net income of Rs 1,364 crore for the first half ending December 2000. This is despite a turbulent equity market, which has seen the bellwether BSE Sensex slide by 16.35 per cent over the same period. Yet, the sharper bout of volatility in the current calendar is likely to have impacted the fund's ability to book profits. Two, the portfolio is being gradually rebalanced (for good) in favour of debt instruments. But, despite a rally in bond prices, there are chances that net income would be lower or could at best match up to last year's level.

Top Equity Holdings (30/04/2001)      % of Assets   Reliance Industries   14.47   I T C   6.51   Reliance Petroleum   6.01   Infosys Technologies   2.15   TISCO   1.87   HDFC   1.85   I C I C I   1.83   State Bank   1.78   Hindustan Lever   1.75   MTNL   1.43   Hindalco Industries   1.40

   

Top Debt Holdings (30/04/2001)      % of Assets   G O I   20.73   Reliance Petroleum   1.20   Jindal Iron & Steel Co.   1.11   IDBI   0.74

Amid the widespread volatility in both debt and equity markets, investors at large reposed faith US-64. Till December 2000, unit capital was up from Rs 15,146 crore in June 2000 to Rs 15,993 crore. Thus, the income required actually would be higher, given that the fund also has to maintain some reserves.

The possibility of a lower dividend payout is not the only break away from the past. The Deepak Parekh committee's deadline for taking UTI NAV-based expires in February 2002. With just nine months left for the deadline, it is just a matter of time when real health of the fund is exposed. While it is not possible to hazard a guess on the NAV, it is certainly below the repurchase price, which even a spectacular surge in the markets is unlikely to bridge. Thus the repurchase price would be realigned downwards. From then on, the NAV of the fund would be subject to market volatility and could move up or down.

With the declining dividend and the reality of a NAV-based pricing lower than its current repurchase price, US-64 ceases to be a 'safe and risk-free' investment.

Source: Value Research

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