BOMBAY, 15 March 2004 — Unit Trust of India (UTI), Asia’s largest public sector mutual fund, is once again in the news. And this time also, for reasons most unexpected.
Buoyed by the success of its conversion of its Unit-64 mutual fund into tax free bonds, UTI is now offering a tax-free return of 6.6 percent for investors in seven of its assured return schemes.
These bonds are to be offered as a conversion option to investors of seven schemes, which are being foreclosed from April 2004. The seven schemes are — Children’s Gift Growth Fund of 1986 (CGCF-86), Children Gift Growth Fund of 1999 (CGCF-99), Bhopal Gas Victims MIP 1992 (BGVMIP), Monthly Income Plan of 1998 and 1999, Rajlakshmi Unit Plans of 1994 and 1999. All these schemes will be closed on March 31, 2004 with the same date as the payment date.
The officials related to the exercise said the outgo of government would depend on the number of customers opting for these bonds. Yet, if all the unitholders of all the seven schemes decide to opt for the bonds, then UTI will have to be prepared for an outgo of Rs.50 billion. The value of bonds provided would be equal to the assured value of the units as on March 31, 2004.
Now the question doing the rounds is — will these bonds be as popular as the bonds which were issued in place of the US 64? Analysts say that concerns of rising interest rates in the secondary market could be a dampener. Instead many of the corporates are expected to buy these bonds from the secondary market and thus benefit from attractive rates.
If one may recollect, some time back, UTI had made a similar offer to its US-64 unitholders. And that had proved to be a great success. This gives an excellent opportunity for the NRI’s to buy into tax free bonds who are otherwise not entitled to buy tax-free bonds. As these bonds are tradable and freely transferable, these will be listed for trading on the stock exchanges. Unitholders can then sell these bonds in the open market through their brokers.
These bonds are expected to fetch a premium over the face value. This money can then be reinvested in the 6.50 percent tax-free bonds or the 8 percent taxable bonds, depending on the tax status of the unitholders, for safe and high returns.