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US-64: Ringing out the old? - Views on News from Equitymaster
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  • Dec 29, 2001

    US-64: Ringing out the old?

    As the New Year approaches, a lot of mutual fund investors and mutual funds will be looking at ‘Ringing out the Old’ and ‘Ringing in the New’. But for India’s largest mutual fund – Unit Trust of India, the New Year has even more significance as it prepares to go NAV-based (net asset value) like its peers in the mutual fund industry.

    To say that the Year 2001 was a harrowing time for US-64 investors is an understatement. Enough ink (and cyberspace in our case) has gone in elaborating all that. (Investors who would like to jog their memory can read about it here). Its now time to delve on the most important event in US-64’s history since its launch – getting NAV-based and competing on a level-playing field with its peers in the industry.

    The implications
    Beginning January 1, 2002, US-64 will be available for fresh investment at the NAV. This means that investors who enter the fund after this day, will do so at the prevailing NAV and not the administered price as was the case earlier. According to some reports in leading business dailies, US-64’s NAV is in the region of Rs 7.55-8.00. If this is true, then the NAV is down nearly 50% from Rs 14.55 – the entry price in May 2001. So an investor who had entered US-64 in May 2001 at Rs 14.55 and is still holding his units now, has seen a near-50% erosion in his investment in just 7 months!

    However, UTI did have a window open for the retail investor allowing him to redeem upto 3,000 units at the administered price till March 2003.In a bid to pacify investors further, the fund has hiked the redemption limit to 5,000 units, which covers about 99% of US-64 investors (as per news reports).

    Structural issues
    Going NAV-based is without doubt, a giant leap for US-64. Another problem of Herculean proportions includes the heavy tilt towards equities, which is one of the root causes behind its worries today. If US-64 had stuck to its balanced nature (60:40) it could perhaps have avoided this situation. The fund has addressed this issue as well by declaring its intentions to go 55:45 over a period of time and perform the ‘balancing’ act better.

    But that’s not all
    Somehow US-64’s investment decisions were always looked at with some suspicion. After the 'Cyberspace Technologies' drama unfolded in May 2001, this suspicion turned into certainty. Investment decisions is one area that will continue to hound US-64 for some time. Good stocks bought at high prices, bad stocks bought at high prices, its continuing infatuation with Reliance that figures high in its equity portfolios even now, debt paper of poor credit quality. These are just some of the issues facing US-64 right now. The string of committees set up to address this recommended setting up an independent AMC (asset management company) and sponsor just like the other mutual funds so as to weed out such investment decisions.

    Lessons to be learnt
    Obviously US-64 has embarked on a major restructuring drive that should tell investors that its heart is in the right place. Of course, the cautious investor would like to see all these recommendations become a reality. We believe that fresh investors should give the fund some time. See the various recommendations unfold, achieve a level of certainty about the fund and its performance and then think about investing in the fund.

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