| triumph of trust
Calcutta, April 4: Around two lakh out of 56 lakh investors of US-64 have opted for repurchase of their holdings till today, senior officials of Unit Trust of India (UTI) said.
Today was supposed to be the last day for investors to indicate whether they wanted the Trust to repurchase their holdings or convert their units into five-year tax-free bonds with a coupon rate of 6.75 per cent.
But in response to requests from some investors, the Trust today decided to extend the deadline till April 10, confident that it would not lead to an exodus.
Thanks to the impressive response to the bond, the Trust would not have to borrow to fulfil its repurchase commitments, officials of the country’s largest mutual fund said.
B. S. Pandit, executive director of the Trust, said: “We do not have the final figure yet, but our understanding is that around two lakh investors chose to exit. We certainly do not need to borrow from banks to meet our repurchase commitments.”
For holdings up to 5,000 units, the Trust will pay Rs 12 per unit, and Rs 10 for each unit in excess of 5,000.
Armed with the government-guaranteed bond, US-64 has reclaimed its lost glory, albeit in a different avatar. It is now the most sought after mutual fund scheme among corporate and high net worth investors.
The 6.75 per cent tax-free bond that the Trust will be issuing to investors of US-64 is, at present, the most attractive fixed-income security for corporate investors. Interest on the bond will be paid every six months, which takes its annualised yield to 6.86 per cent.
“The next best tax-free instrument available to corporate investors offers a yield-to-maturity of 5.2 to 5.3 per cent. This means that the yield on the US-64 bond will gravitate towards that range if interest rates do not rise. And, as a consequence, the market price of the instrument will rise significantly,” explains a bond market observer.
The attractiveness of the bond is manifested by the fact that units of US-64 are already trading at a premium on their repurchase value, on the National Stock Exchange (NSE).
Units with repurchase values of Rs 12 and Rs 10 are traded separately on the bourse. US-64 Cash Income Rs 12 closed at Rs 12.30, and its twin — US-64 Cash Income Rs 10 — at Rs 10.15 on NSE today.
Bond market operators believe price discovery of the instrument is yet to begin. “Once the bonds are issued (on June 1), you could expect fireworks at the counter,” they said.
A rough calculation shows if the annualised yield on the bond were to fall by 1 per cent to 5.86 per cent, the market price of a Rs 100-bond would go up to around Rs 105. The Trust has said the face value of each bond would be Rs 100, and they are going to be listed on bourses.
Investment advisers say even small unit-holders who do not come under the tax net, should opt for the bonds, and exit later. “It’s likely to lead to a handsome capital gain. They could then invest the sum in small savings schemes that offer higher rates of interest,” said an investment adviser working for a private bank.
The bonds are likely to be tradable even in the physical mode. Pandit said: “We are going to make some arrangement for small investors to sell their bonds in the physical mode. These are likely to be picked up by high net worth investors, banks and institutions (at a discount to the market price).”