US-64: Another bailout… - Views on News from Equitymaster

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US-64: Another bailout…

Jul 10, 2001

This time its for real. The finance minister (FM) seems intent on bailing out US-64 for one last time by restructuring the scheme rather than pumping funds into it to shore up reserves. The FM seems to have realised that the finance ministry was not set up with the explicit objective of acting as lifeguard to a sinking US-64. That is one of its implicit objectives, but that’s a different matter altogether.

News reports indicate that the FM will bail out US-64 one last time and the package will be finalised by the weekend. However a couple of points are worth noting. This time around it will not be a financial bailout reminiscent of the Rs 33 bn bailout in 1998. This time the FM means business and will be looking to restructure the scheme, however details about the restructuring process were not divulged.

The 1998 bailout should have served as a warning to everyone concerned and that includes the FM, UTI and the small investor. However, no one entity seems to have learnt enough from it which only underlines the importance of taking lessons from history.

Yes, there was an effort made by setting up the Deepak Parekh committee, which suggested two important measures for ‘reforming’ US-64. First to bring US-64 under the purview of the Securities and Exchange Board of India (SEBI) like all other mutual funds, by making it NAV-based (net asset value) and declaring portfolio, etc. on a regular basis. This was a regulatory measure that would have brought US-64 at par with other mutual funds. The other important recommendation was to give US-64 a more balanced look. (US-64 is a balanced fund but has historically been heavily tilted towards equities, which is the root of its problems today).

UTI ignored the first recommendation and only gave due dates to fall in line with SEBI’s mutual fund regulations. However, if there was something that UTI could have done, it was to give higher allocation to fixed income in its portfolio and tone down its equity weightage, especially in view on the volatility in equity markets. But fools venture where angels fear to tread. UTI not only ignored that recommendation but has made some pretty dubious equity investments over the months that will now be the subject matter of an inquiry as promised by the FM.

Hopefully this will be the last bailout for everyone concerned. The FM has spoken of opening a window for the small investors within a few days. We can be sure that investors will be rushing in hordes to exit from US-64. We can also be relatively sure that these investors will not want to have anything to do with US-64 ever again. This may give credence to the view that it may be a little too little too late. The FM has indicated he is serious this time, he better be. Even the guy who cried wolf had a problem the third time.

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