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Sour experience for US-64 dividend strippers

Aabhas Pandya

It has been a sour experience for dividend strippers in Unit Scheme-64. The scheme had seen short-term investors pour an estimated Rs 6 billion during the first fortnight of June 2000 at an entry price of Rs 14.95 per unit. These investors were expecting a higher dividend payout in Unit Trust of India's flagship on the back of a buoyant equity market last year.

That the dividend of 13.75 per cent has turned out to be a dampener for these investors is apparent (see US-64 declares 13.75% dividend). For instance, if the short-term investor entered the fund at Rs 14.95 and plans to exit on the July repurchase price of Rs 13.20, he actually faces a loss of Re 0.37. This is because the tax-free dividend and the repurchase price add to up to only Rs 14.575 against the entry price of Rs 14.95.

Assuming that the repurchase price moves identically like last year, the short-term investor can exit US-64 only in October, when the repurchase price of Rs 13.65 and the dividend of Rs 1.375 will add up to Rs 15.03 against the entry price of Rs 14.95. Here, the investor gains a paltry 8 paise or an annualised return of 1.6 per cent! Clearly, the short-term investor is at the mercy of UTI to earn at least some money on his shortsighted investments.

Anyway, the dividend payout has been a disappointment for a large section of investors. For an investor, who entered the fund in July last year at Rs 13.5, the dividend yield turns out to be an unimpressive 10.18 per cent. The investor would have been better off investing in any of the medium-term debt funds. The repurchase price for July has been fixed at Rs 13.20. If an investor were to exit the fund in July, the return is a paltry 7.96 per cent. Clearly, US-64 is fast losing its charm.

US-64 had slashed the dividend payout last year to 13.5 per cent against 20 per cent in 1998 after its reserves turned negative to the tune of Rs 10.98 billion as on June 30, 1998. While the dividend was made tax-free in the hands of investors in 1999, it was no compensation for a large part of the investing community, whose dividend income anyway came within the ambit of the overall tax exemption on dividend income.

Source: Value Research

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