US-64: A survivor’s guide

A lifeline just about keeps investors afloat

US-64 vs other balanced funds: A comparison

Launched in 1964, not only is US-64 the flagship scheme of UTI but also the oldest mutual fund scheme in India. It  pioneered the concept of a mutual fund in a country like India, which had till then seen only equities or bank fixed deposits as a means of investment.

US-64, with an investor base of 20 million,managed to garner close to Rs 19 crore in the first year of its inception. And the corpus gradually swelled to Rs 18,749 crore as in October 2000. UTI’s total assets were Rs 55,924 crore, more than 50% of the total assets of Rs 97,953 crore of the domestic industry, during the same period.

US-64 has been rewarding its investors with attractive dividends right from its inception. The dividend, which was 6.1% in the first year, had risen to 26% in 1994. Compare this with the then existing meagre bank deposit rates of 3.75%-6%. No wonder, US-64 rose to become a trusted name among small investors.

Besides regular appreciation in dividend year after year,  US-64 provided its investors tax benefit (under section 10 (33), 48 and 112 of Income Tax Act, 1961) and liquidity by way of regular repurchases and sales. Hence, US-64 came to be viewed as a safe investment avenue providing assured returns.

This has been made possible by the   huge difference in the pricing strategy of the scheme compared to other funds. Unlike other funds which fix their sales and repurchase prices of the open-ended schemes based on the scheme's net asset vaue (NAV), the sale and repurchase prices of US-64 were not based on the NAV.  Also, the fund never declared the NAV, making it difficult for an investor to judge the performance of the fund.

A point worth noting is that although the scheme was not classified under any type, its portfolio always had a mix of equity and debt component, like any balanced fund. It was this allocation in equity and debt which made it possible for the scheme to provide higher returns to investors year after year.

The income distributed (dividend) was 18% in 1989-90 and subsequently rose to 25% and 26% respectively in 1991-92 and 1994-95. However, the dividend came down to 20% in 1997-1998, 13.75% in 1999-2000 and paltry 10% for 2000-01. The stock market crash, which saw the Sensex eroding roughly 20%, was responsible for the falling dividends.

A look at its debt-equity allocation shows that in June 2000, 49.67% of the assets were in equity with an exposure of 20.73% in government securities, 4.85% in other kinds of debt and 24.75% were parked in call money.

However, in April 2001, the equity component rose to 69.30%, while debt component touched 5.92%. The remainder 24.78% was into other categories. Probably, the fund managers wanted to stop the downslide in returns and also beef up the NAV as the fund had a deadline of February 2002 to align its sales and repurchase prices to NAV.

This ratio of equity and debt achieved this year seems too high considering that, on an average, other balanced schemes are supposed to have a debt-equity ratio of 40.09:59.91. The debt-equity component for JM Balanced was 48.43:51.57 and for Cantriple it was 46.27:53.73. Compare this with US-64’s debt-equity ratio of 30.7:69.3. As per Sebi regulations, however good the equity markets may be, a balanced fund has to mandatorily set its maximum investment limit of 59% in equities. Clearly, with an over-exposure to equity, US-64 had crossed its investment limit.

Portfolio holdings
A common feature in most balanced funds is that their top holdings are in debt or call money market. For instance, US-64 had invested 20.73% in RBI Bonds, JM Balanced had an exposure of 16.25% in call while CanPremium had a huge 61% in government securities. Prudential ICICI, on the other hand, had a holding of 9.11% in Hindustan Petroleum debentures. Other top holdings of US-64 comprise 16.22% in non-convertible debentures (NCD) of ILFS and 16% in debt instruments of Reliance Industries.

JM Balanced had 16% in ILFS NCDs and 17% in Reliance debt instruments. About 19% of Cantriple is locked in government securities. CanPremium has 19.69% while Canganga has 9.28% in call money market. HDFC Children's Gift Scheme-Investment plan has 11.84% in government securities and 11.15% in debt instruments of Reliance Industries. Kothari Pioneer Pension Fund has 24.62% of its funds locked in current assets. Finally, the K-Balanced scheme from Kotak Mahindra Mutual Fund has a substantial 28% in government securities and about 5.38% in net receivables.

Now, let's check out the equity exposure of these schemes. Take US-64 where 14.47% is in Reliance Industries equity, 6.51% in ITC and about 6.01% in Reliance Petroleum and Infosys.  JM Balance has 9% in Grasim, Cantriple has 5.94% in VSNL and 3.93% in Ranbaxy. Canpremium has 3.84% in Infosys. Canganga has invested 9.24% in Infosys and 4.05% in HCL Tech. Prudential ICICI Balance Fund has about 9% in Grasim. Interestingly, the major equity stake of HDFC Children's Gift -investment plan is in Hindustan Lever at 4.52%. Surprisingly, none of the top holdings of KP Pension Plan are in equity.

Trends in returns
No doubt, all balanced funds, like US-64, have been greatly affected by the stock market turmoil due to their exposure in equities. But they have been  insulated to a large extent by their debt exposure.

JM Balanced Fund tops the list with returns of 13.56% over three months (ended 30 April, 2001), 11.43% and 3.79% over six months and one year respectively. It has posted a net return of 10.11% since its inception.

Cantriple has posted negative returns over the past one year but shows 3.12% returns since its inception. Canganga, too, has sunk deeper into the negative performance territory since inception. But has shown signs of improvement over the past one month. Canpremium, another balanced fund, has provided net returns of 2.49% over three months. Its performance over six months and one year has been 11.21% and 22.91% respectively.

KP Pension Fund has registered returns of –3.6% and 3.42% over three months and six months respectively. Its returns since inception are 13.26%. Prudential ICICI Balance Fund has posted -8.18% since inception. While K-Balance has posted returns of  -13.78% and -5.23% over three months and six months since inception. Hence, the average returns on other balanced funds over three months are -5.09%. The BSE Sensex, in the same period,changed .....%

Repurchase and sales prices
Assuming the repurchase price of US-64 as its NAV for the purpose of calculation of returns, we find some interesting information. The scheme has posted net returns of 18.75% over three months ended beginning of May. Returns over six months and 1 year are 4.01% and -2.06% respectively. But how is it possible for the fund to achieve these returns and provide the dividends it did, considering its debt-equity ratio.

The conclusion is that the sales and repurchase for the last 3 months were totally out of alignment with the scheme's NAV.

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