Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
UTI: Welfare of small investor - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 9, 2001

    UTI: Welfare of small investor

    That's no joke! It is among the objectives set out in the preamble of The Unit Trust of India (UTI) Act. The recent imbroglio has dominated the headlines over the past week and may continue to hit front page till North Block chalks out a revival strategy. Step one has seen a change at the helm with the UTI supremo ordered to submit his resignation papers. But will this lead to change in fortunes for the beleaguered mutual fund.

    Much of the damage to UTI and the flagship scheme seems to have been done over the months May and June. Incidentally, or maybe not, a leading publication reported of the rot in UTI in early May '01, which could have sparked off the fear, at least, among the more savvy.

    From the numbers that are being reported, some back of the envelope calculations could indicate the estimated net asset value (NAV) of the fund. The corpus size of US-64, at the start of May, was estimated at Rs 173 bn (30% of total assets managed) with approximately 15 bn units. Based on these numbers the estimated NAV was Rs 11.4.

    However, UTI is reported to have repurchased units at Rs 14.2, which is Rs 2.7 more than the actual value. The beleaguered fund, US-64, over the past two months faced redemptions of approximately Rs 41.5 bn, which at the repurchase price leads to redemptions of 2.9 bn units. By repurchasing above the fair value, the Trust depleted reserves to the extent of Rs 8 bn. The erstwhile chairman, P.S. Subramanyam, has stated that reserves could be 'negative', insinuating that the fund is in trouble. Based on redemptions, total assets under management amounts to approximately Rs 131.5 bn on a reduced base of 12.2 bn units with a NAV of Rs 10.8.

    UTI: Taking a beating
    Rs m  Sale Repurchase Net cash flows*
    Jan-01 6,070 10,340 (4,270)
    Feb-01 13,720 13,180 540
    Mar-01 6,450 4,280 2,170
    Apr-01 4,500 7,470 (2,970)
    May-01 3,760 23,020 (19,260)
    * incremental
    Source: AMFI

    U.S-64 has declared a dividend of 10% or Rs 1 per unit, which will result in a further out flow of Rs 13.4 bn including dividend tax. This number seems to tally with reports stating that the Trust is looking to raise funds of Rs 13 bn towards payment of dividend (reportedly footed by State Bank of India). Adjusting for dividends the assets under management reduce to Rs 118 bn with a NAV of Rs 9.7. However, some reports state that total assets under management are Rs 125 bn, after adjusting for dividends the NAV works out to Rs 9.1.

    UTI has sought moratorium of six months to repair the damage implicitly indicating their expectations on market direction. To sew up the hole in US-64 and revert to May'01 repurchase price based on NAV the fund will need to augment assets under management (on same unit base) by an estimated Rs 54.3 bn to Rs 61.7 bn. The lifelines available to the fund are:

    • Bailout '01, déjà vu, similar to bail out '98 funded by the Government, which amounted to Rs 33 bn. Only this time the bill could be slightly steeper for Mr. Sinha. The finance minister has stated that small investors' interests would be protected. The statement could tantamount to funding, maybe partially, the bailout package. However, the development is in contrast to the earlier stand of not sponsoring any package.

    • Bull run on the market leading to a growth in US-64 assets. Based on the above numbers, for the NAV to rise to May '01 repurchase price levels, the asset prices have to rise by an estimated 46% to 55.3% (assuming unit correlation between the Sensex and US-64, the Sensex will have to rise to 4,811 - 5,117 levels for the fund to plug the hole). In any case, within six months, to recoup the losses will be a tough task.

    • Link NAV to repurchase and sale price, letting small investor take the hit. However, this does not seem very likely due to the large retail investor base of US-64 and the issue snowballing into a political hot potato.

    A revival package could combine elements of all three. With financial engineering gaining steam, innovative ways are being identified to remedy the situation. Reports state one of the alternatives as splitting the fund into pure debt and equity schemes in proportion of the assets. This also solves the issue of rebalancing the portfolio. US-64 is primarily an income fund. However, the equity and debt assets are estimated to be in the ratio of 65:35. The fund needs a complete reversal in asset allocation to live-up to its income characteristics. Whatever be the upshot, attracting fresh investments could become doubly hard for UTI, as it is not a case of once bitten but twice bitten, always shy.



    Equitymaster requests your view! Post a comment on "UTI: Welfare of small investor". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Let's Hope This Correction Continues (The 5 Minute Wrapup)

    Aug 14, 2017

    Last week's correction is making a number of Super Investor stocks look a lot more attractive...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 16, 2017 (Close)