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Adieu US-64! MF pioneer gets a burial

The scheme, dreamed up to usher in millions of small investors, is being buried, reports MC Vaijayanthi.

business Updated: Jul 28, 2007 01:59 IST
MC Vaijayanthi

The nation's first mutual fund scheme, dreamed up to usher in millions of small investors and introduce them to the concept of investing in markets, is finally being buried.



Tens of thousands of beleaguered investors of the famed Unit Scheme 64 (US-64) scheme of the erstwhile Unit Trust of India (UTI), who were given low-interest bonds in lieu of their dwindled investments as part of a government-funded bail-out package, have now been given a reasonably viable exit option.



Beleaguered investors of the erstwhile US-64 scheme, which at its peak had an estimated 20 million investors, were issued 6.75 per cent tax free bonds, as part of a Rs 14,500 crore rescue mission by the government.



These bondholders have now been given the option of switching over to either existing schemes, or forthcoming new fund offers of UTI Mutual Fund. UTI MF has sent letters to holders of US 64 bonds offering to switch their bonds into a new fund offer, India Lifestyle Fund. "We did a pilot project on the switchover option three to four months ago and the response was good," said UK Sinha, MD & CEO, UTI Mutual Fund. UTI is willing to extend the switchover option to any future new fund offers, as well as existing open ended-funds, Sinha added.



UTI Mutual Fund was created after the original UTI, founded in 1964 by an Act of Parliament, doddered in 2002, under the combined effects of scams, mismanagement and the burden of unrealistically high "guaranteed" returns.



Subsequently, it was carved into two companies. The first, UTI-I, took over US-64 and other guaranteed return schemes. The second took over all other schemes, was handed over to banks to manage, and eventually morphed into UTI Mutual Fund.



Faced with a massive erosion in UTI's assets, the Centre, to prevent a total market collapse, offered partial compensation to stranded investors. It offered to buy back up to 5,000 units at a price of Rs 12 per unit, and additional units at a price of Rs 10 per unit. However, thousands of investors refused to accept the offer, as that would have entailed booking heavy losses on their investments.



Besides, UTI found that it was unable to meet even these reduced redemption commitments. It suspended repurchase of US-64 units for six months and finally opened up repurchase, but with a cap of 3,000 units per unit-holder, at Rs 10 per unit.



This still left tens of thousands of investors high and dry, as many held units far in excess of the 3,000-unit cap. In fact, a sample survey had found that US-64 was considered as the safest investment option after bank and post office deposits.


Faced with a Rs 6,000 crore gap between the value of its investments and what it would have to had to pay out even at Rs 10 per unit, UTI, in May 2003, issued bonds guaranteed by Government of India to those investors who had not exercised their redemption option. These bonds paid 6.75 per cent per year, and the government waived tax on this interest.



Nevertheless, the cost in terms of potential earnings has been huge for investors. At the time of conversion, the BSE Sensex was around 3,500 points. Today, it is nudging the 16,000-point mark.