Meleveetil Damodaran loves football. These days, he believes, games are won and lost depending on how good the goalkeeper is. Yet, it is the strikers who hog the limelight. So he is writing a book on the greatest goalkeepers. Though tough, this is the easier part of his day. For Damodaran, administrator for Unit Trust of India (UTI)-I and chairman and MD of the UTI Asset Management Company, is simultaneously scripting the end of an era and the beginning of another in the saga of India's oldest and largest mutual fund. And that will not be easy. To millions of Indians, the UTI has symbolised trust and investment on the one hand and broken dreams and failed promises on the other.

MELEVEETIL DAMODARAN

"Bonds make UTI attractive"

UTI Asset Management Company Chairman and UTI-i administrator M. Damodaran advises investors on their UTI units in an interview with Associate Editor Vivek Law. On what US-64 investors should do: There are no government bonds as attractive as the ones UTI is offering. It will be specially attractive to those in the highest tax bracket, to high net worth individuals, banks and institutions who are bound by the Rs 2-lakh investment cap in some other bonds. If you are in need of cash, then you can redeem your units with bonds and we will arrange for banks and institutions to pay you more cash by exchanging your bonds. But if you want to invest the cash elsewhere, then you should hold on to the bonds. On what MIP holders should do: We cannot allow the NAV to keep dipping by paying out hefty returns. A lot will depend on whether dividend tax remains. So it makes sense to stay put or move over to other UTI-II schemes. On what UTI-II investors can look for: No more shortfalls. It will be run professionally. SEBI compliant from Day 1. Products that are not doing well will be closed and innovative ones will be introduced.

From February 1, UTI won't be the same again. The Big Daddy of the Indian mutual-fund industry-which at its peak managed funds worth Rs 75,000 crore-will be back in business, albeit in a much smaller and cleaner avatar. With assets worth Rs 15,000 crore under management, UTI Mutual Fund-as the better half of the trust or UTI-II will now be called-will have to fight on performance and not on promises of inflated assured returns.

It will still be the biggest mutual fund in the country, but will have at least three private-sector mutual funds closing in. Unlike the debt-heavy private-sector funds, UTI Mutual Fund has Rs 7,000 crore of its assets in equity which allows a much higher upside if the markets perk up. It also has a strong network and is the lowest-cost mutual fund. "Once it gears up its distribution, it could be a formidable player," says Shailendra Bhandari, MD, Prudential ICICI Mutual Fund which has assets worth Rs 10,000 crore.

Where Damodaran will need to bring all his skills of goalkeeping to play is in managing the other Rs 30,000 crore-that which belongs to the other half of UTI or UTI-I. These are the assured-return schemes, including the mammoth US-64 scheme for which the Government has promised to meet the Rs 14,000 crore current shortfall-the difference between the promised return and the current value.

Fears of the Government and UTI having to fork out huge sums on May 31, 2003-when US-64 comes up for redemption-have now receded. Damodaran has been able to convince the Government to offer its bonds to US-64 investors. UTI will now no longer be obliged to sell its equity holdings in the stock market to meet the redemption pressure, which could have destroyed whatever little is left of the secondary markets. Such an eventuality would have also knocked the bottom out of most of UTI's schemes which have a considerable equity base.

UTI-I

Government owned; 22 assured-return schemes; Rs 30,591 cr corpus

FATE OF INVESTMENTS

US-64

Investors to be offered tax-free, tradeable bonds without an investment cap from June, 2003.

Investors can also opt for cash.

The price of a unit in the secondary market may be higher than the NAV.

UTI expects most investors to opt for bonds; will wind up the scheme.

Monthly Income Plans

Interest rates may be reset on five MIPs launched during 2000-1.

Five MIPs floated during 1998-99 may face foreclosure.

US-64-like bonds may be introduced.

UTI - II

Owned by LIC, SBI, PNB and BoB; 47 schemes; Rs 15,179 cr corpus

WHAT IT REALLY IS

LIC, PNB, SBI, BoB may merge their mutual fund business with it.

May induct a strategic partner.

But the mandate is clear. These schemes will have to be wound up sooner rather than later. The Government announced last week that it would issue five-year, tax-free, tradeable bonds with an expected 6 per cent annual return to investors who bought US-64 units on or before June 30, 2001 and to those who buy them from the secondary markets after January 28, 2003. These bonds will be issued at the time of redemption. Only those investors who bought US-64 units from the market between November 15, 2002 and January 20 this year-when trading was withdrawn-will not be eligible for these bonds.

Damodaran is striking deals with banks and financial institUTIons (FIs) to set up redemption counters to purchase bonds from investors. The cash received will be more than the assured return of Rs 10 (for holdings of more than 5,000 units) and Rs 12 (for less than 5,000 units). He says banks and FIs would find the instrument attractive because they offer good returns, liquidity and have no investment cap-features not available collectively in any other government bond. Even those investors who want cash can earn more by taking the bonds and then redeeming them. "We expect investors to opt for these bonds whether they want cash or an alternate investment instrument," says Damodaran (see interview). "Investors who had come into US-64 by paying Rs 14, had already been assured up to Rs 10-12 by the Government. We feel this package will bring them closer to the Rs 14 figure."

Meanwhile, Damodaran expects the secondary market to set a higher price for a US-64 unit. On the first day of trading, for instance, there were bids of Rs 9 for a US-64 unit but there were no sellers. Investors in immediate need of money who would have got no more than Rs 6 (the NAV of the scheme) today can now exit at higher levels. "Investors should not exit in panic," advises Dhirendra Kumar, CEO, ValueResearch, a mutual-fund tracker. "The coupon on the bonds should be made attractive by the Government to attract investors," he says. More sops pertaining to capital-gains tax relief for those who buy these units and hold on to them are on the anvil.

The US-64 formula, if successful, will be applied to the monthly income plans (MIPs) as well. Currently, the UTI is getting government bonds and selling them to banks and FIs to meet the shortfall in these assured return schemes. Where it is possible, interest rates will be reset and in other cases (especially for the long-term schemes) a foreclosure is on the cards. A lot would depend on whether the Government abolishes dividend tax in the coming Budget as that would determine the returns an investor gets.

Damodaran is betting on the stock markets perking up. With little redemption pressure, UTI will not be forced to offload its holdings. This, he says, should be reason enough to perk up the stock markets. If the stock markets do get bullish, then Damodaran will find it easy to put all the equity holdings on the block, make good money for the Government and bury UTI's past sins forever.

Either way, by bifurcating UTI, the Government has tried to ensure that the ghosts of the past don't return to haunt the new-look mutual fund. The challenge would now be to explain this to investors, many of whom have seen their trust continuously eroded over the past few years. Damodaran has given himself six months to finish his book on goalies. The market, too, may not give him more time to restore UTI's broken trust. And UTI's goalkeeper cannot afford to lose this match.