New Cat on the Block

If it is only the cat that is entitled to nine lives, with what face is US-64
seeking yet another, and who is going to pay for it? Even before memories of its
disastrous performance and subsequent bailout costing Rs 3,300 crore in 1998-99
have faded, the Big Daddy of the mutual fund industry, and a government
enterprise to boot, is down on its knees again.

In this second episode, the cash infusion needed to service sagging NAVs on
1,500 crore outstanding units is a staggering Rs 6,400 crore. And this time,
there is no Union Budget for the finance minister to juggle figures around in
and eke out the funds. Most importantly, this time there is no justification
that Unit Trust of India can forward for its predicament–it is clearly a case
of UTI having made and hung on to the wrong investments, with other people’s
money. Burning down the house is easy when it isn’t yours.

An expert without expertise?

For a moment, let us forget UTI, let us forget it is a government-run ship,
let us forget its disastrous forays with US-64 and Mastergain. Let us forget the
earlier bailout and the need for another one today; let us simply talk mutual
funds. When individual investors don’t have either large enough chunks of
money, or the necessary expertise to invest directly and take direct exposure to
equities, they turn to the experts–mutual funds. MFs perform the job of taking
these small bits of money from a huge number of investors and then investing the
monies in the market. Their USP–though the returns might not be as high as in
the equity market, the investments will be safe and rock-solid. With US-64, as
with so many other tech funds flooding the market, UTI has fallen back on its
very own version of the Hippocratic Oath–that of protecting investor interests
(read money).

As in the case of Harshad Mehta and his securities wranglings; as in the case
of Ketan Parekh and his K10 shenanigans; as in the case of Chain Roop Bhansali’s
NBFC manipulation; as in the case of the plantation companies and their ‘bumper
rewards offers’; and as in the case of technology-based mutual fund issues, it
is the small investor who has got his fingers burnt every time. Only this once,
we don’t even have the lame excuses of equity market volatility and private
sector obeisance to explain the rot away–for what we have here is the tragic
instance of millions being let down by a government institution that was set up
with the intention of protecting the interests of these very people.

Even if one were to overlook US-64 and talk of UTI as a whole, retail
investors have thumbed their nose at the public sector giant.

Net inflows at UTI dipped by a whopping 93% to Rs 323 crore in 2000-01,
against Rs 4,548 crore in 1999-00. In the same period, UTI mopped up Rs 12,413
crore from the market while redeeming units worth Rs 12,090 crore, leading to a
net inflow of just Rs 323 crore. Admittedly, public sector funds excluding UTI
saw a net outflow of Rs 1,044.5 crore, which is up by 40.21% over the net
outflow of Rs 744.92 crore in 1999-2000. So UTI is doing better than its PSU
counterparts, but is that good enough?

Private sector 30 times better!

If we look at the private sector mutual funds, their net mobilization last
year was Rs 9,849.57 crore, over 30 times more than what UTI collected. With
their impressive performance, private sector funds have increased their
marketshare to 28.64% of the total net assets of the Rs 90,586.87-crore mutual
fund industry, against to 23.32% in 1999-2000 and a meagre 9.97% in 1998-99.

On the other hand, the share of UTI in total net assets has come down to
64.04% from 67% in 1999-00 and 77.94% in
1998-99. The share of other public sector funds also has gone down from 12.09%
in 1998-99 to 9.68% in 1999-00 and 7.32% in 2000-01. As on March 31 this year,
total mutual fund net assets were Rs 90,586.87 crore, a drop of 16.08% over Rs
1,07,946.1 crore a year before. On the other hand, net mobilisation by the
mutual fund industry for 2000-01 was
Rs 9,128.07 crore, against Rs 18,969.88 crore the year before, a drop of nearly

Clearly, while UTI has been performing better than the other PSU fund
companies, it is way short of the performance of private sector funds. A market
leader is expected to lead by example…UTI today is leading by the sheer weight
of the trust that people have reposed in it over decades–trust now belayed by

While any leader is permitted its own share of mistakes and miscalculations,
the same over a period of years is unpardonable. For instance, how does UTI
explain away nearly 10% exposure in IT stocks (figure based on its disclosure of
a total of 75% of its US-64 portfolio), spreading over years and continuing,
despite the havoc witnessed in IT scrips? Explain that, and UTI would have
explained quite a bit.

Equities are better off

Interestingly, while most mutual funds, which invest in the market in
equities, are doing horribly; equities themselves are bottoming out and are
almost north-bound. However, how the market reacts as it approaches the
4,000-mark will be the first hint as to its future course. The market can work
off its overbought condition by reversing to test its lows, or by backing and
filling. Of course, the most bullish thing for an overbought market to do is to
become more overbought. If the market were to rocket through the 4,000-level,
then we would be talking bullish days indeed.

64 Provisional Portfolio
on February 28, 2001 (Unaudited)
of issuer
Instrument %
of total market value
Reserve Bank Of India Government security 17.8
Reliance Industries Equity shares 14.99
Reliance Petroleum Equity shares 6.33
ITC Equity shares 5.19
Infosys Technologies Equity shares 3.09
Futuristic Communication
Equity shares 2.13
ICICI Equity shares 2.07
Tata Iron and Steel Co Equity shares 1.85
State Bank of India Equity shares 1.79
HDFC Equity shares 1.64
Hindustan Lever Equity shares 1.62
Larsen & Toubro Equity shares 1.34

Satyam Computers Equity shares 1.29
Telephone Nigam
Equity shares 1.22
Reliance Petroleum Warrants 1.17
Hindalco Industries Equity shares 1.14
Equity shares 0.98
Jindal Iron & Steel Co NCD 0.96
Indian Petro Chemicals Equity shares 0.67
Grasim Industries Equity shares 0.63
National Aluminium Co Equity shares 0.62
Zee Telefilms Equity shares 0.57
SSI Equity shares 0.55
Ranbaxy Laboratories Equity shares 0.54
Global TeleSystems Equity shares 0.51
Dr Reddy’s Laboratories Equity shares 0.48
ICICI Term loans 0.48
Hindustan Cables NCD 0.46
Tata Power Company Equity shares 0.44
Banking Corp
Equity shares 0.42
Morepen Laboratories Equity shares 0.39
Nestle India Equity shares 0.36
BSES Equity shares 0.35
Jindal Vijaynagar Steel NCD 0.34



For those keen to invest in the market, especially in IT stocks, this is not
the time to be careless. There are short-sellers who are licking their chops as
sidelined money is drawn in by the rally. Some see IT stocks as an opportunity
for further short-selling. It would be a good idea to keep the stops tight. It
is more important to protect your investment capital now than it is to get in
near the lows. The market will be here tomorrow, the day after, and for the
foreseeable future. Unfortunately, unless you are careful today, I can’t
promise the same about your money.

Rajeev Narayan in New Delhi

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