As the country oldest mutual fund scheme, now US-64 Bonds, are set be redeemed, it’s tough to find an equally alternative investment. There are some that come close
The oldest mutual fund scheme in India, Unit Trust of India (UTI)’ Unit Scheme – 64 (US-64), will soon be no more. After more than 40 years of existence, curtains will fall on the US-64 bonds that mature on 31 May 2008. UTI has already sent out letters to all bond-holders about the redemption; investors are told to submit their original certificates, take their money back and leave.
For investors like Kolkata-based, Kumaresh Mukherjee, 72 it’s the end of an era. Soon after he retired from Philips India, he invested his provident fund corpus in fixed – return instruments like company fixed deposits. An electrical engineer by profession, in 1995 he also invested Rs 12 lakh or around one-third of his retirement corpus in the erstwhile US-64. After years of above-average returns, then trapped doors and turmoil that shook the Indian financial markets, and finally a repackage, the curtains are now set to fall on the ubiquitous run of US-64 scheme, now US-64 bonds. Like Mukherjee, if you’re invested in US-64 bonds and are about to get your principal money back, what to do?
The story so far
It was a red-letter day in the Indian financial markets on 2 July 2001 when India’s then-largest mutual fund the Unit Trust of India suspended the redemptions of its flagship scheme – US-64, for six months on account of its weak financials. All the skeletons came tumbling out of US-64’s closet.
For instance, up until then, US-64 could be bought or sold only at a fixed sale or repurchase price fixed by UTI and which was Rs 14.25 in May 2001; a month before the death knell was sounded. However, six months down the line on 2 January 2002 UTI disclosed its net asset value (NAV) for the first time in its history, under a huge public outcry, at Rs 6. All hell broke loose. After having used to its annual dividend – it rose from 16 per cent in 1987 to 26 per cent in 1993, where it stayed till 1995 – and therefore under an impression that US-64 was much like a assured-return scheme, investors felt trapped when UTI not only suspended redemption for six months, but also gave rise to aspersions whether investor money was safe or not. The difference between the scheme’s repurchase price of Rs 14.25 in May 2001 and its first-disclosed NAV was Rs 7.44 or 56 per cent, even after adjusting Re 1 dividend in the interim. In 2002, US-64 skipped its dividend – a first in 37 years of its history, up till then.
Then came the government of India’s bail-out package for US-64 investors. Apart from allowing investors to redeem up to a maximum of 5,000 units between August 2001 and May 2003 at an assured price between Rs 10 to Rs 12, UTI also gave a choice of US-64 bonds that paid an interest rate of 6.75 per cent to all the unitholders holding above 5,000 units. Investors were offered either that or redemptions at Rs 10 per unit. Not only did these bonds give 25 basis points more than what the Reserve Bank of India bonds yielded at that time, they were also completely tax-free at the hands of the unitholder. Around 75 per cent of investors, including Mukherjee, opted for the US-64 Bonds because of the assured returns and lack of attractive alternative options.
How to redeem your money?
The redemption process is pretty simple. If you hold up to 200 bonds, all you need to do is to give your bank account details, latest by 15 May 2008 to UTI if they do not already have it. If UTI has been sending you interest payments so far by Electronic Clearing Service or by cheques with your bank account details printed on them, it means that UTI already has your bank details. They’ll send your principal amount cheque in the first 10 days of June 2008. You need not surrender your bond certificates.
The key to look up the number of bonds is your customer identification number (ID). When the UTI letter says that its 200 bonds, it means 200 bonds per customer ID. So even if you have more than one folio but have less than 200 bonds in each of them, you do not need to submit your bond certificates.
If you have more than 200 bonds in a single folio, you need to send your bond certificates before 25 May 2008. Here too, bank account details are mandatory. Fill out the bank particulars form that UTI has sent you alongwith the redemption notice. Submit this form and bond certificates, if necessary, to the UTI Branch in your city (visit http://www.uti.co.in/ to know your nearest centre) or send them by courier or ordinary post.
Where to invest the redemption proceeds?
In the communication that UTI has sent you, it has suggested five of its existing schemes to invest your bond proceeds in. Although if you wish to invest in any other UTI MF scheme, you can do by just mentioning its name and the plan (dividend or growth) that you would like opt for.
We suggest you skip these schemes. Except for UTI Fixed Term Income Fund (UFTI), all other alternatives are diversified equity-oriented funds. UTI Infrastructure Fund (UIF) is a thematic fund and therefore riskier and we wouldn’t advise you increase the risk levels of your monthly income-yielding corpus by notches. And although UFTI is a fixed maturity plan where downside risk is minimal, it won’t pay you regular income.
Remember, you invested in US-64 bonds because you wanted some kind of regular income. Plus, it also offered tax efficiency like none other. For instance, if you are in the highest tax bracket, your effective tax rate works out to be 10.22 per cent. Ideally that is what you should get from your alternative instrument avenue where you will now park your redemption proceeds.
Presently, there are no instruments that pay you a tax free and assured return to the tune of 10.22 per cent. But if you are risk averse and like to avoid equities, your first priority should be Senior Citizens Savings Scheme (SCSS) if you haven’t already exhausted its upper limit of Rs 15 lakh. Mind the age requirement though.
The next best alternative is the Post Office Monthly Income Scheme (POMIS). The maximum limit has only recently been raised to Rs 4.5 lakh in a single account and Rs nine lakh in a joint account. If you have exhausted your SCSS limits, take advantage of the increased limit in POMIS. Both of the above carry the government of India’s guarantee.
If, however, you do not mind taking on some risk, try mutual fund schemes that invest zero to up to 40 per cent in equities. These are debt-oriented schemes that invest marginally into equities; we call them Equities – marginal exposure and Equities – significant exposure. <’Introducing the OLM 50’, 10-23 April 2008>
Or, if you to invest in equities the whole way, stick to exchange-traded funds. These are close cousins of index funds as they invest in all the scrips in the same proportion as they lie in their benchmark indices, like Nifty or Sensex. They are passively-managed and do not carry the fund manager’s risk. And due to their inherent structure, their expense ratios are lower than index funds.