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UTI ban to make US-64 market-driven, say analysts

The decision of Unit Trust of India to suspend redemptions of units in its flagship fund for six months will make its investment strategy during the suspension period more market-driven, analysts said on Tuesday.

There has been concern over the threat posed to the Indian share market if UTI, the largest investor, were compelled to begin selling large blocks of stock to raise money to meet an upsurge in redemptions.

"Their decisions will now be more a function of market movements," said Abhay Aima, an independent market analyst.

State-run UTI, the country's largest investment manager, on Monday suspended sales and purchases in its monster US-64 fund up to year-end, in response to a sharp rise in withdrawals triggered by declining performance.

US-64 is the nation's largest unit trust, alone accounting for about 15 per cent of the Indian mutual fund industry's assets of about Rs 900 billion.

Analysts said the massive fund's investment decisions in recent months were driven by increased redemptions, requiring UTI to sell investments regardless of price trends to raise money needed to redeem units.

In April and May, investors redeemed Rs 41.5 billion worth of US-64 units, data released by UTI on Monday showed.

"They (UTI's decisions on when to buy and sell) will be now subject to market forces like all other mutual funds," Aima said.

Market pressure

The upsurge in US-64 redemptions occurred as turnover on Indian bourses fell sharply, the results of moves taken to curtail the influence of speculators in the wake of a major market meltdown in March.

Daily turnover on the Bombay Stock Exchange has slumped to 50-80 million shares the past two months, down from 150-200 million before the crackdown on speculative trading practices.

"In this thin market selling even Rs 1 billion worth of stock can bring the market down by 10 per cent," said Vivek Reddy, the chief executive officer of Madras-based Kothari Pioneer Asset Management Co, a rival Indian mutual fund operator.

But analysts said there were now concerns other funds of UTI might see a rise in redemptions, leading to another source of selling pressure in the market.

"Faced with a squeeze, investors who have money distributed over various UTI schemes might pull out funds out of schemes other than US-64," said a fund manager overlooking investments of around Rs 3 billion. According to its Web site, UTI manages over Rs 750 billion, of which Rs 200 billion is invested through US-64.

UTI has a special status in India's mutual fund industry, having been created in 1964 under a special act of Parliament.

Its US-64 fund does not come under the purview of the Securities and Exchange Board of India like other mutual funds and is ruled by a special charter.

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