The Hindu Business Line : UTI Monthly Income Plans 99(2) to 2001: No choice but to hold

INVESTORS may not be too happy with the dividend payouts announced by the Unit Trust of India (UTI) for 2003-04 on its five Monthly Income Plans launched after August 1999. The dividends range between 3.04 per cent per annum and 5.12 per cent. But to "hold" still seems to be the appropriate course of action for investors in four of out the five MIPs with this annual reset feature.

Hold to protect capital

This is because holding on till redemption is the only means by which holders of these schemes can redeem their units at Rs 10 per unit (the UTI has promised capital protection at maturity, for which it has the backing of the government). Investors who pull out now would find it quite difficult to bridge the gap between the current NAV and Rs 10 per unit, by investing in alternative investment avenues.

MIP 99 (2) — Hold: The UTI has declared a dividend of 3 per cent for the current year on the monthly income option. The annualised yield works out to 3.04 per cent for the annual dividend and cumulative options. Investors pulling out now would have to earn a compound annual return of 23 per cent on the redemption proceeds over the remaining period of the scheme, if they are to equal the returns when UTI redeems units at Rs.10 per unit. This is assuming that the UTI maintains dividends at 3 per cent over the residual period of the scheme. Even if the UTI completely skips the dividend payouts hereafter, investors pulling out now have to manage 20 per cent per annum over the remaining period.

MIP 2000 — Hold: The UTI has pegged the dividend for 2003-04 at 3.04 per cent per annum. Investors pulling out now will have to manage a return of 32 per cent per annum over the residual period of the scheme to match what UTI will offer at redemption, if it redeems units at par. This is assuming dividends continue at 3.04 per cent per annum.

MIP 2000(2) — Hold: The 2003-04 dividend has been announced at 4.07 per cent annualised. But investors pulling out now will have to generate a compound annual return of 18 per cent on their investment over the remaining tenure to match UTI's offer at redemption. If dividend payouts are skipped, investors would have to generate a 14.4 per cent return over the residual period to match UTI's offer.

MIP 2000(3) — Hold: UTI has pegged the dividends at an annualized 4.07 per cent. Investors pulling out now will have to generate a 12 per cent return on their funds over the residual period to make up for the guarantee made by the UTI, if it maintains dividends at current levels over the remaining tenure of the MIP. If it does not, investors need to generate only a 8 per cent annual return to match UTI's offer. But given the certainty in UTI's offer, holding the units still seems to be the best course for investors.

MIP 2001 — Sell: Unlike the previous four MIPs, investors in this scheme may be better off pulling out their funds at this juncture. Since the NAVs of all of the options in this fund are over Rs 9 per unit and there are a full 36 months to maturity, investors may be in a position to make up the gap between the NAV and Rs 10 per unit, by investing the proceeds in alternative investment avenues. To match the returns that UTI would offer by redeeming units at Rs 10 at maturity, investors would need to generate a compounded annual return of just 8 per cent over the remaining tenure of the scheme. But this is assuming UTI maintains dividend payouts at 5 per cent over the next three years. If the UTI chooses to bring down the dividend declarations over the next two years, investors staying in the scheme may have to make do with much lower returns than the 8 per cent per annum indicated above.

Fund facts: The five MIPs mentioned here are five year close-end schemes. he UTI resets the dividends on these schemes at the beginning of each year. All of these schemes originally carried a three-year lock-in period. But with the UTI recently revoking the lock-in period, investors now have the option of exiting these at the prevailing NAV.

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