Search the Internet          Tips  Sites: Finance, Investment

It's a sick family of MIPs at UTI

Aabhas Pandya

Is Unit Trust of India sinking deeper into the MIP (Monthly Income Plan) quagmire?

All the five MIPs of UTI launched in 1997 are only a year away from redemption, but the NAV (Net Asset Value) of the cumulative and monthly options are below par.

It is no different for the 1998 series where another five funds have sub-par NAVs. With returns guaranteed for the entire tenure in these MIPs, UTI fund managers surely have a Herculean task on their hands.

For, the UTI owns an ill-equipped Development Reserve Fund (DRF), which guarantees returns in MIPs on the back of an asset base of Rs 12 billion. On the other hand, the 10 funds of 1997 and 1998 had a combined corpus of Rs 96.7 billion on February 28, 2001.

However, UTI's executive director, B G Daga is confident that shortfalls, if any, will be met from the DRF and the Trust will honour its promised returns. "We are currently making tight provisions for NPAs, which is pulling down the NAV. However, most of them will be recovered by the time of redemption. Any gap beyond this will be met from the DRF, which has adequate resources."

Whether UTI recovers its sunk money is a matter of time. Given the current gap between the NAV and assured returns, it is the cumulative options of funds which pose a serious threat. Consider Monthly Income Plan 1997 (II), which assured an annualised 14.93 per cent for all the 5 years. The offer document says that returns will be "cumulated" at the assured rate of 14.93 per cent per annum such that Rs 2000 invested under the option will become at least Rs 4012 on redemption.

In other words, the NAV should be at least Rs 20.06. While the fund is just over a year away from redemption, the cumulative option is currently at Rs 8.95. Thus, investments under the plan have to grow at an annualised 98 per cent, a near impossible task given the state of the markets and also a cap of 20 per cent on fund's exposure to equities.

The sub-par NAV reflects that not only has the Trust been unable to reinvest any dividend, it has also lost a part of the initial capital. It's a sad state of affairs under the monthly option too, where the NAV is at Rs 7.75- a gap of Rs 2.25 per unit.

It is not possible to arrive at the precise loss since the break-up of unit capital under the two options is not known. While most investors do not opt for the cumulative plan, where the shortfall is particularly alarming, the collective toll could still be high since NAVs are below par for both the options.

However, we still attempted at arriving at the likely gap in MIP '97 (II), based on the assumption that 90 per cent of the unit capital is locked in the monthly option while a conservative 10 per cent is invested in the cumulative plan. This translates into a current shortfall of Rs 5.72 billion, given the fund's unit capital of Rs 18.25 billion in June 2000.

Clearly, yesterday's money-spinners for UTI have today become an albatross. With a gap staring in its face, tough time lies ahead for the fund house and only efforts on a war footing can resurrect the beleaguered schemes. While fixed-return schemes are now a passe, the promises of the past continue to haunt the Trust.

Source: Value Research

Money

Fund news

Tell us what you think of this report