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UTI Monthly Income Plan 2000 (II)

Unit Trust of India has slashed the coupon for the second monthly income plan for calendar 2000 by one percentage point. The Trust has assured a tax-free monthly income plan (MIP) at 9.25 per cent against 10.25 per cent in its first MIP for 2000, launched in January this year. The monthly coupon of 9.25 per cent translates into an annualised return of 9.65 per cent.

The Monthly Income Plan 2000 (II) has a term of four years and nine months and the IPO closes for subscription on June 24, 2000. A close-ended fund, MIP will open for repurchase after three years at net asset value (NAV)-based prices. The scheme offers options for a monthly, annual and cumulative income with a minimum investment of Rs 10,000 and tax-breaks under section 54EA.

UTI fund managers will have to scout for debt instruments with a coupon of around 13-13.5 per cent in order to pay 9.65 per cent for the first year, besides optimising returns from the equity component, which has varied between 20 and 30 per cent in previous MIPs. The spread of around 3.3 per cent over the first year's assurance of 9.65 per cent will go towards annual recurring expenses and payment of 22 per cent dividend tax, which comes into effect from June 1, 2000.

The cut in coupon is attributed to a steady fall in interest rates, which started with the reduction in public provident fund rate from 12 to 11 per cent in January this year. This was followed by a one per cent cut, each in the cash reserve ratio and bank rate on April 1, which further pulled down interest rates in the market.

However, despite efforts to bring down interest rates, there are signals to the contrary that interest rates will firm up in the medium-term. Besides the large borrowing programme of the government, there are signs of a pick-up in credit demand from the corporate sector, which could tighten liquidity in the system. The drought-like situation in several parts of the country will only compound the problem. The rate of inflation is also beginning to move up after remaining low for most part of last year.

"Apart from the domestic factors, there is a limit to which the Reserve Bank of India can cut interest rates since rates are rising in the US and other nations in the G-7," says Nilesh Shah at Templeton. The turbulence in the global equity markets including India will lead to a slowdown in portfolio investments in the country. Add to it, the shaky US markets could result in a setback to plans of Indian companies planning to raise money through American Depository Receipts. A string of global floats, as planned by India Inc, would ease the pressure on liquidity - one, at least a part of the issue proceeds is converted into rupees and two, these companies will no longer look for funds in the domestic market.

So, should investors put money in UTI's MIP at 9.65 per cent for the first year? With UTI now revising the payout on MIP every year, investors will receive a higher dividend income next year if interest rates harden. However, investors today have the option of investing in open-ended MIPs offered by other funds like Alliance, Templeton, Tata and Sun F&C. Though these MIPs do not assure returns, they reflect the changing dynamics of the market - an investor will not have to wait for a year to receive a higher dividend payout if interest rates move up. The open-ended MIPs also offer the growth option, and hence, investors can avoid paying the 22 per cent dividend tax and augment return on investments.

So there isn't any point in locking money for three years in UTI's MIP as investors could opt for the open-ended MIPs which don't have a lock-in period. "This will also enable investors to change their asset allocation depending upon market situation from debt to equity and so on," says Parijat Agrawal at Sun F&C AMC.

The monthly income plans have become the main source of fresh collections by UTI. In 1999, UTI had garnered Rs 40 billion in two MIPs including a record mobilisation of Rs 27 billion in the first MIP for 1999, which had assured returns for all the five years. In the first MIP for 2000, UTI got an inflow of around Rs 10 billion.

Mutual Funds - IPO

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