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US-64 – To redeem or not to redeem… - Views on News from Equitymaster
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  • Aug 3, 2001

    US-64 – To redeem or not to redeem…

    That is the question uppermost on the minds of investors who have had the misfortune of putting their money and trust in US-64.

    August 1, 2001 marked the first day when the Unit Trust of India (UTI) allowed redemptions under US-64. As per reports appearing in leading business dailies the redemptions were low, a little above Rs 55 m. The panic sales that most people expected on the first day did not happen.

    There seems to be some tentativeness in the air with US-64 investors. They seem to be weighing the options – should they remain with the fund or should they exit.

    Lets look at both options a little closely.

    If investors stay for 12 months, they stand to clock a 12% growth. Under the bailout scheme a unit will fetch 10 paisa (starting with Rs 10) more with every passing month. So over 12 months they will make Rs 1.2 per unit. They will also collect the 10% dividend declared on US-64.

    If they choose to exit, they will get the par value i.e. Rs 10. For investors who have invested in US-64 at Rs 14-15 in the past, an exit at par value can be very disturbing.

    Now lets look at the facts. UTI has admitted that US-64’s NAV is below par. So redeeming at Rs 10 is actually a drain on UTI’s resources and with every passing month this will get worse. Its not really clear how UTI plans to bridge the yawning gap between the exit price and the NAV and then there is the 10% dividend declaration. Of course UTI seems to be confident of fulfilling all its obligations. But right now credibility comes at a premium where UTI is concerned and investors have already been a victim of its misplaced confidence in the past. Moreover, UTI’s fate hangs in balance with how equity markets perform over the next few months and that itself is unclear. Political compulsions, stock scams and the CBI inquiry are other factors that have given the US-64 several twists over the past few days.

    So what should investors do? The safest thing of course is take what you get today (Rs 10) and be happy with it. To wait for a higher exit price has a slight risk element given the circumstances and its something investors can avoid at the moment.

    A government-backed investment has a major plus point as it gives investors an element of assurance. However, the drawback with such an arrangement is that the investor is taking a call on the government’s credibility and commitment. We believe enough has been said about that already. So it’s a devil’s alternative for the investor – to redeem or not to redeem. We believe he should redeem when he can. When the going gets tough, you don’t want to be around.



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