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More trouble for UTI in Rajlakshmi schemes?

Aabhas Pandya

The Unit Trust of India has decided to terminate Rajlakshmi Unit Scheme '92 (RUS '92) and get out of trouble, but there could be more problems round the corner for the mutual fund giant.

After the launch of RUS in 1992, UTI had launched two versions of the scheme in 1994 and 1999, albeit with a lower assured return of 14 per cent and 12 per cent, respectively. With a steady decline in interest rates, UTI has been forced to redeem RUS '92 since it can no longer generate the assured return of 16.4 per cent. Now, the moot point is that if UTI is unable to pay 16.4 per cent today, will it be able to sustain a coupon of 14 per cent or even 12 per cent in the future.

Rajalakshmi Unit Scheme II (1994), a re-launch of RUS '92, was meant for the girl child below five years of age. Assured returns in this scheme, imply that the invested amount at the time of birth would grow by 14 times in 20 years, which translates into a return of 14.12 per cent. While Rajlakhshmi Unit Plan '94 has a unit capital of Rs 4.18 billion, RUP '99 has a capital base of Rs 0.69 billion. The current size of the two funds is estimated to be over Rs 10 billion. In fact, UTI was earlier forced to stop fresh sale of RUP '94 units in September 1998 amidst declining interest rates. The Trust had seen heavy inflows as investors locked their investments at 14.12 per cent even as interest rates were beginning to move down.

However, RUP '94 may not pose a major challenge for UTI since it has a review clause embedded in the offer document. The clause gives UTI the right to review the assured yield. In case the yield is lowered, investors will be given an option to redeem at NAV-based price. Thus, even while RUP '94 may not be terminated, one could see returns being lowered in the near future.

UTI need not look further to re-affirm that interest rates have dropped in the last few years. In its hugely successful monthly income plan series, the annualised assured return has dropped from an average 14.5 to 14.8 per cent in 1996 to around 10 per cent in 2000. The last MIP for the current year assured a coupon of only 10.2 per cent for the first year, down whopping 430 basis points from 1996-levels.

While UTI's resolve to redeem the fund is indeed a bold step - considering that it has to face the wrath of 1.24 million investors, the RUS '92 saga also reflects UTI's lack of will to come to terms with market forces.

Had that been the case, UTI would have simultaneously reviewed the assurances in the other two plans and thus not continued to hold out false hopes to thousands of investors in RUS '94 and RUP '99. Given that interest rates have been heading southwards in the long-term, it will not come as a surprise if another girl child is disappointed in the future.

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