The Hindu Business Line : US-64: Take cash, skip the bond

THE date for redemption of US-64 is fast approaching. Most investors can opt for cash of Rs 12 or Rs 10, as the case may be, on May 31, 2003. Or, for 6.75 per cent five-year tax-free bonds instead of cash.

If investors opt for cash, the stock market may be affected. US-64 held stocks worth Rs 6,460.95 crore at the end of January 2003.

The top ten stocks in the portfolio alone are worth around Rs 3,764 crore. If the UTI sells stocks to raise cash, that could depress stock prices. However, the Government has said that, in such an event, it will support the UTI to meet cash redemptions.

The UTI may then not need to sell the stocks. The market, however, may remain jittery till the uncertainties are resolved.

Both the UTI and the stock market would be happy if investors choose the bond option. But does the bond offer value?

The RBI Relief Bonds might offer a slightly better deal for small investors with a sum of less than Rs 2 lakh at their disposal. These bonds were offering 8 per cent before the Budget. Now, the rate may be reduced to 7 per cent.

Announcements in this regard are still awaited. In addition, individuals may also want to invest in schemes such as post office monthly income schemes, which offer a yield of 9.66 per cent.

If the interest income is deducted under Section 80-L, the effective yield would be higher. That would make it more attractive than the UTI's tax-free bond.

In fact, opting for cash makes sense for smaller retail investors who do not pay a sizeable tax on interest incomes.

These bonds offer yields that are quite attractive for companies, though. A five-year government security offers yields of 6.20 per cent, and the income is taxable.

In contrast, the yield of 6.75 per cent is tax free. However, companies can earn a higher return by employing the cash in their business.

The liquidity of these bonds is also untested. The response of companies is, however, key to ensuring that redemptions do not strain the UTI, the Government and the markets.

Suresh Krishnamurthy

Article E-Mail :: Comment :: Syndication

Stories in this Section
Accept these open offers

Max New York Life's Pension Plan

Dividend yields and value managers

A show of Caliber

The fall and fall of FII inflows

Liquidity counts, influence wanes

Hero and Honda — Fill it, shut it, forget it?

Pension reforms: Timely answer

Grasim/L&T: Needed, bold approach by institutions

And the nominees are...