BUSINESS ENVIRONMENT

The business environment in the last year saw extremities on all fronts-sluggish industrial growth, volatility in the stock markets, successive scaling down of interest rates both in domestic and international markets, global slowdown, worldwide tech/dotcom meltdown, uneven distribution of monsoon, rising fiscal deficit coupled with lower credit growth in the domestic economy and so on. MF industry also witnessed lower mobilisation and higher redemptions.

Despite a market friendly and growth-oriented budget, markets after an initial euphoric rise to 4272 on March 1, 2001 went into a tailspin touching a low of 3184 on 12th April 2001 recovering only by 6% to trade in a narrow range ever since. During the same period the NASDAQ also touched a low of 1639 on 4th April 200 land then recovered nearly 24% to trade above 2000. Interestingly, even the DOW JONES fell to its lowest level of 9389 on 22nd March 2001 then recovered nearly 13% to trade above 10500. During this period, it touched a high of 11338 on 21st May 2001. The market movements since 3rd July 2000 till date reveal that BSE Sensex has fallen by over 30% while the NASDAQ has fallen by over 49% during the same period.

Again looking back, from September 1998 till date, the pattern shows that DOW was the first to bottom out on 10th September 1998 (7615), followed by NASDAQ (1419) on 8th October 1998 and the Sensex (2764) on 20th October 1998. All three peaked within a couple of months of each other -DOW was the first to peak on 14th January 2000 (11723, a rise of 54% off the bottom) followed by the Sensex on 11th February 2000 (5934, a rise of 115% off the bottom) and finally the NASDAQ peaked on 10th March 2000 (5049, a rise of 256% off the bottom). Although it is difficult to actually trace a correlation between the indices, sentiments on the whole are reflective of the NASDAQ gyrations apart from factors specific to the Indian markets. The slowdown in industrial growth as also exports in the current fiscal are also taking their toll on the markets and general business environment. Despite volatility in the market, our fund managers used every rally to book profits and rebalance portfolios. 

Mutual Fund Industry in India also had its share of problems as a result of the unusual events in both the domestic and international markets. Although UTI has not supported dividend stripping, the industry reported cases of dividend stripping, which has been curbed by the government recently. The dividend tax for last year touched a peak of 22.4% increasing the burden on the mutual fund schemes paying dividends. This has now been bought down to 10.2%. Another trend witnessed was the investor preference for liquid and gilt funds across the industry. A closer analysis of the sales mobilisation in the industry reveals that some high net worth investors and corporates appear to be churning their investments in mutual funds at a much faster rate. This means that the same investment appears under sales mobilisation a number of times reflecting increased velocity of money or the multiple deposit creation and the resultant increase in sales mobilisation by the MF industry. This is corroborated by the report on the 5th household Investors' Survey conducted by SCMRD which states that ratio of repurchases of units of mutual fund units to assets under management is unusually high for some mutual funds thereby implying lower holding periods for investments. UTI's liquid funds fortunately did not witness such high turnover this year nor in any of the previous years and the ratio for UTI is very low implying that investments are held for a long term.

UTI's PERFORMANCE
Looking Back

It is a matter of significant record that UTI has, over the years launched 147 different schemes to suit different investor needs with special focus on small investors and mobilised over Rs.150,000 crore. Till date, 60 schemes have been redeemed with redemption value of Rs.20,000 crore. This excludes the normal repurchase of units of over Rs.98,000 crore during the currency of schemes and dividend distribution of over Rs.53,000 crore made above market rates over the years. The core strength of UTI has been to retain the large number of small investors, who have remained with UTI for long years, unlike the predominance of fewer investors in the liquid schemes of new generation mutual funds.

In all, currently UTI has 87 schemes in operation with about 4.1 crore unit-holding accounts. UTI has 65% of total mutual fund assets under management. UTI is well entrenched among investors and savers in each and every district of the country. UTI has a wide marketing network covering 266 well-trained chief representatives, 119 Chief Agents and over 67,000 agents. UTI is committed to strengthen its marketing network and give it a total IT thrust for quicker and better investor services. 

It is in this context that we review the sales performance of the last year. UTI suspended sales of assured return schemes viz. CGGF 86, RUP II and SCUP and terminated the RUS 92 earlier than scheduled with a total fund size of over Rs.1500 crore, in keeping with the regulatory requirements. With the launch of the UTI Mahila Unit Scheme with more favourable features, the sales under Grihalaxmi Mahila Unit Plan were suspended with effect from 26th January, 2001. Full redemption were made in respect of nine schemes (viz. IISFUS 95, MIP 95 II, MIP 95 III, MIP 96, MIP 96 II, DIP 95, UGS 2000, MEP 91 and EOF 96) which matured during the year with a total fund size of Rs.2380 crore. 

Total annual domestic and offshore sales of UTI for the year 2000-2001 aggregated Rs.10143 crore against Rs.16846 crore in the previous year. Repurchases and redemptions at Rs.11929 crore (excluding early termination of Rajlakshmi Unit Scheme 92) were less compared to Rs.12673 crore in the previous year.
 

• US 64 accounted for nearly 26% of the total year's sales. 
• US 95, a dynamic balanced fund attracted substantial inflows from retail investors, recorded the highest ever sales, registering an increase in sales of over 12 times and over 13 times in terms of fresh applications.
• Nifty Index Fund, a passive index fund, also recorded a 150% jump in sales during the year. 
• UTI MMF continued to be popular with investors with sales crossing the Rs.1000 crore mark to touch Rs.1303 crore. 
• The equity funds mobilised of Rs 832 crore despite volatile market conditions. 
• CCP, a children segment scheme attracted sales of Rs. 624 crore.

3 new schemes, UTI Mahila Unit, Scheme and 2 MIPs launched during the year collected Rs.1271 crore. The Mahila Unit Scheme was launched to commemorate the 'Women's International Year'. It has a unique 'Gift Cheque Option, the first of its kind, issued in units. Another new scheme, The India Technology Venture Capital Unit Scheme received commitments of over $21.4 million out of which 20% has been called up.

Corporate Governance 

UTI Is committed to the best practices in corporate governance and towards this end , during the year 2000-01 emphasis was put on qualitative disclosures at greater frequency. It has become easier for the investor and analysts to assess authentic data. The disclosures in the Offer Document were further strengthened in line with SEBI regulations. 

Regulatory Framework

All UTI schemes  launched after July 1994 fully comply with all SEBI regulations. During the 1st year, 4 pre 1994 schemes viz. ULIP, CRTS, CCP and GCGIP were made fully compliant with SEBI guidelines and with this all schemes except US 64 are now fully compliant with SEBI guidelines. 

Implementation of the High Level Expert Committee recommendation

Of the 19 recommendations of the High Level Committee, 16 have already been implemented. While recommendations regarding setting up of an Asset Management Company for US 64 and increasing the number of trustees by 5 will require amendment to the UTI Act and are being addressed separately, another recommendation to make US 64 NAV driven will be implemented this year. 

Communication 

UTI's website, unittrustofindia.com is being used as an effective tool both for marketing as well as for dissemination of information. This site is being enriched with more content, user friendly features and quick access. UTI Bulletin and Trustmail, the monthly newsletters from UTI provide timely Updates. 

Technology Focus and Investor Servicing 

With greater integration between systems, there has been considerable reduction in the accounting and processing times. Despatch of certificates, statement of accounts, income distribution, repurchase proceeds, redemption proceeds, etc. are completed well within the time schedules specified by SEBI. For the first time, a statement of the actual ,capital gains after indexation was sent to ULIP investors along with the maturity proceeds. The sales application forms, after sales service forms and the option for conversion forms were simplified and consolidated during the year making them more user friendly and convenient to access and use. Special relaxations were made in after sales services to the earthquake affected unit holders and their kith and kin in Gujarat. 

During the year, considerable progress has been made in the development of the generic software which is currently undergoing rigorous testing to ensure smooth transition from the current style of distributed processing to a fully centralised one. UTI has already set up a Data Centre to house the central servers and network management facility. The Central Processing Centre to carry out all service requests received from investors is being co-located. This is expected to be the largest transaction processing entity in the country. UTI has already procured all the hardware and system software and they are now being installed. Pre-migration validations and purification of the existing data with the UTI branches and Registrar and Transfer Agents is underway before final consolidation into a Central Data Base along with the signature of the investors. The work on the generic software and the implementation of the BPR recommendations is being monitored on a weekly basis and also quarterly at the Board Level. Plans are made for setting up a Disaster recovery Centre. Investors can thus access the records of their holding data anytime, from anywhere.

Network Expansion

As part of the plan to open 100 UTI Financial Centres (UFCs), during the year, three pilot UFCs were opened at Mumbai, New Delhi and Kolkata. These centres aim to provide a more comprehensive sales and after sales services to the investors. Each of the UFCs will have a standardised design and infrastructure to save on the capital and maintenance costs. In addition, the sales force manning these centres will also receive special training to offer comprehensive investment advice to the investors. UFCs would be using sophisticated tools like the Financial Planner to help the investors understand their needs and plan for investments. The initial feedback from three UFCs has been encouraging.

The sales force of UTI is being constantly reviewed to weed out inactive agents and retrain the active ones to enable them to help investors take more informed decisions. Training for the AMFI certification programme for UTI agents was extensively conducted in association with UTI ICM and AMFI at subsidized rates. The Agents' Manual was completely revamped and is now a treasured document both for UTI's vles force and investors. The interaction with the Zones and Branches was increased to keep them up-to-date and better equipped to handle all situations.

Synergies with UTI associates 

During the year, as per target, 1OO% of UTI offices cash flows were organised to be routed through the Cash Management Services (CMS) of UTI Bank for efficient funds management through speedier realisation of funds collected from investors across the country. UTI Investor Services Limited is being revamped up to become the single transaction processing agency for UTI schemes, a more cost-effective solution. UTI Securities Exchange Ltd. (UTI SEL) is now working towards providing quality broking services to a larger cross-section of players both in debt and equity. In line with SEBI regulations, UTI's business transacted through UTI SEL has been scaled down to the permissible levels. UTI Investment Advisory Services provides investor advisory services to UTI's India Growth Fund as also extends fund accounting/compliance services and research support in respect of off-shore Funds. Services of UTI Institute of Capital Market are utilized for training of UTI employees and agents, investor education as well as research support.

DOMESTIC EQUITY SCHEMES

During the year, 15 domestic equity schemes comprising 14 open-ended schemes and one interval fund, open for sale, collected Rs.832 crore. UTI Growth Sectors Fund (UTI- GSF), comprising five sectoral funds i.e. Brand Value Fund, Pharma and Healthcare Fund, Software Fund, Petro Fund and Services Sector Fund with total sales of Rs.392 crore, accounted for 47% of the total sales under equity schemes.
Repurchases under equity schemes aggregated Rs. 1005 crore. During the year, Index Select Equity Fund (formerly called Index Equity Fund) was made open end from October 2000. MEP 98, a closed-end tax saving equity fund, opened for repurchase from 1st April 2001. The year also witnessed maturity of two equity schemes viz. UGS 2000 and MEP91, both of which completed their 1 O-year tenure. Another equity fund, Equity Opportunity Fund matured on 30th June 2001: The redemptions from these 3 Funds aggregated Rs.564 crore. UTI uses different benchmark indices keeping in view their suitability to the investment objective of equity schemes. As on June 29, 2001, on a I-year basis, 18 out of 26 schemes and on since inception basis 19 out of 26 schemes have outperformed benchmark indices. Both the passive index funds have performed consistently with tracking error of less than 50 basis points which is the best among all the passive index funds in the market and within the international norm of 1%. 

During the year, Index Select Equity Fund recorded a 3-year return of 20.14% and a CAGR of 11.64% since inception. MEP 99 recorded a CAGR of 36.05% since inception. UTI GSF - Petro and Services recorded a CAGR of 17.45% and 41.86% respectively since inception.

Investor friendly measures in equity schemes The year 2000-0 I was the year of income distribution. For the first time in the history of the Trust, 15 equity schemes made tax-free income distribution. Facility of switchover was introduced between equity schemes under which investor would not be required to bear back-end load. This has improved the returns to equity scheme unit holders. In another investor friendly measure, units of 5 equity schemes (US 92, MEP93, MEP95, MEP96 & EOF) which can be repurchased from UTI were delisted from stock exchanges thereby avoiding loss on account of discount to NAY at which most of such funds are trading.

DEBT-ORIENTED SCHEMES

UTI currently manages 46 income-oriented schemes. Total sales under debt-oriented schemes were Rs. 6519 crore and repurchases of Rs.5993 crore which included redemptions under 6 schemes namely DIP 95, MIP 95(11), MIP 95(III), IISFUS 95, MIP 96 and MIP 96 II matured during the year with a total fund size of Rs.1816 crore. Although the capital was not assured in the offer documents of these schemes, the returns given for them were 2.5% - 4.4% above the 5-year bank deposit benchmark. 

• The performance of open-ended debt funds:
• UTI Bond Fund had a CAGR of 12.63% p.a. since its inception in June 1998 an a 1- year return of 12.49%. The current size of the Fund is Rs.1536 crore. The deferred sales charge of 1.5% of NAV applicable for repurchase made within a period upto six months was reduced to 1% and 0.5% of NAV for repurchases made within three months and over three months but upto six months of the investment respectively, 
• G-Sec Fund had a CAGR of 12.9% p.a. since its inception in September 1999 and a 1- year return of 13.77%. The current size of the Fund is Rs 526 crore. The Fund distributed a dividend of 12% for the year. It has been decided to split the face value of units under the scheme from Rs. 100/ to Rs. 10/ to enable investors to get more units though the value of the investment would remain the same.
• UTI Money Market Fund had a 1 year return of 9.92%. The current size of the Fund is Rs.401 crore. During the year, the 15 day lock-in period was removed and the per day account withdrawal limit was raised to Rs.. 20 crore from Rs. 10 crore. 
• Under US95, an interim dividend of 10% and a final dividend of 3.5%  has been declared to make a total of  13.5% p.a., a reasonable payout in volatile markets. The scheme is a balanced fund and has assets under management of Rs 210 crore. It has been decided to split the face value of units from Rs.100/ to Rs. 10/in this scheme also. 
• Under Retirement Benefit Unit Plan, a life-cycle product targeted towards the superannuating needs of individuals, an income distribution of ReI per unit (1.0%) has been declared. Assets under management in the scheme are Rs 274 crore. The scheme's returns since inception are 11.6% p.a.
• Under CRTS 81, a scheme targeted towards Charitable Trusts and Societies total income distribution, including an interim dividend of 5%, is 9% for the year. The total Fund size is Rs 666 crore.
• Senior Citizens Unit Scheme, sales under which is presently suspended, is designed to provide reimbursement of hospitalization expenses of the unit holder and his/her spouse after the age of superannuation; An income distribution of 9% annuity/ appreciation (face value of Rs. 10/- per unit) has been declared this year. Assets under management in the scheme are Rs 159 crore. 
• Under GUP, an income distribution of Re 0.90 per unit has been declared for all investors who joined the scheme on or before 30/06/2000 and are on the books as on 30/06/2 001. Assets under management in the scheme is Rs. 87 crore. 

OFFSHORE EQUITY FUNDS

During the year, UTI raised Rs.171.87 crore under offshore Funds managed by it. The current size of UTI offshore funds is Rs. 1065.17 crore. The NAY of the oldest of UTI's offshore funds, India Fund was Rs. 880.21 crore as of 30th June 2001 and the Fund size was Rs. 116.58 crore. The Rupee NAV of close-end India Growth Fund as on 30th June 2001 was Rs.688.87 and the Fund size was Rs. 289.48 crore. To enhance shareholders' value, the Board of IGF had decided to make a tender offer of 40% of the funds common stock at N A V to reduce the discount of around 28.49% between the NAV and the listed price. After the tender offer was completed on 14th February 2001, the discount was around 14.03%. The net outflow was Rs 254.92 crore. On January 12, 2001 the Fund distributed 0.4688 cents per share as a dividend to its shareholders after a gap of three years. The net outflow was Rs.14.8 crore. On May 24, the Fund announced a share buy-back programme of upto 10% of its outstanding shares at the market. The period of buyback would be announced later. During the year, the India I.T Fund received inflow of Rs. 18.29 crore and outflow of Rs.238.52 crore. The current Fund size of India I. T. Fund is 468.93 crore. The size of India Media Internet Communication Fund and India Infrastructure Fund are Rs. 42.83 crore and Rs.91.87 crore respectively. India Access Fund successfully tracked the S&P CNX Nifty Index.

UNIT SCHEME 64

Total mobilisation under US 64 was Rs 2661 crore during the year. This constitutes 26% of the total sales of UTI under all schemes. Repurchases during the year aggregated Rs.5962 crore. During April–May 2001, the scheme had significant repurchases of Rs 4151 crore. The Unit Capital of the scheme is Rs.12778 crore as on 30th June 2001. Since 1998, US 64 increased exposure to growth sectors like IT (from 1.2% as on 30.6.98 to 21.7% as on 30.6.2000), Pharma (from 1.06% to 4.18% ) and FMCG (from 4.19% to 8.6%). It has increased its equity exposure to Petrochemicals, FMCG and Refineries sectors to 25.11%, 13.94% and 10.71% from 16.99%, 8.60 % and 7.02% as on 30th June 2000. Exposure to software sector has been reduced to 7.41 % from 21.70 % as on 30th June 2000. Similarly, exposure to the Telecom Sector has also been reduced to 3.41% from 9.00%. Now the scheme has a well-diversified portfolio of new and old economy stocks. Old economy stocks comprise 88.29% of the total equity portfolio of the scheme which includes Petrochemicals (28.44%), FMCG (15.79%) and Refinery (12.13%). All this helped US 64 to report improved performance. During 2000-01, US 64 went through active churning and restructuring which allowed it to earn income despite adverse market conditions. Despite falling interest rates and steeper fall in stock prices, the scheme earned a net income of Rs. 1523.83 crore, i.e. an income of Rs. 1.193 per unit on the outstanding unit capital as on 30.6.2001. To stay tuned to the market, interest rates on instruments of similar risk profile, the Board of Trustees have decided to make income distribution @ 10 % for the year 2000-01. The post-tax return with the highest tax rate of 30.6% for individuals works out to 10.68% on the July 2000 sale price. 

Year 2000-01 has been very turbulent for all economies and markets the world over including the Indian markets. Even though the interest rates showed a downtrend world-wide, the stock market prices which should normally have moved up, declined due to slow down. Till the presentation of the Budget 2001, it was reasonably expected that UTI would be in a position to soon switch US 64 to NAV based pricing. However, the post Budget events have unfortunately bellied all expectations. The bearish markets and the stock market irregularities have affected the valuations of the scheme adversely. These events have accentuated stock market reforms, viz. abolition of badla, introduction of rolling settlements, index and stock options. The markets are expected to readjust to the changing regulatory framework and future rallies in the market would hopefully be sustainable. Under these circumstances, the restructuring of US 64 portfolio would necessarily call for time. Hence, in the best interests of the long term investors of US 64, UTI's Board of Trustees have decided to suspend both sales and repurchases of US 64 units, for a period upto six months. This time will also be utilised to divest strategic holdings of the scheme securing better prices.

The other non-permissible assets, as per SEBI regulations, held by the scheme, may also be transferred to make it ready for calculation of NAV at periodic intervals. UTI is working on a tight schedule to ramp up all systems and procedures to ensure smooth transition to the desired NAV mode. Adequate steps, have been taken to realign portfolio to facilitate declaration of NAV at weekly / daily intervals. In the meantime, the investors who have opted for reinvestment of dividend under the scheme, normally done at 2% discount to the July opening sale price are being given the option to reinvest dividend at the first sale price fixed when the scheme reopens for sale or invest in other schemes of UTI or receive the amount in cash. In the meantime, as US 64 is listed on the Wholesale Debt Segment of NSE/OTCEII Bangalore, Delhi and Ahmedabad stock exchanges, liquidity needs, if any, of the investor are taken care of.

LOOKING AHEAD

With a view to further sharpen the focus of UTI Financial Centres, Rediffusion DY&R have been retained to build upon the UTI brand. The coming up of Central Data Processing Centre will release personnel in Branch Offices of UTI who will intensify the marketing efforts. Thrust will be on marketing with greater emphasis on rationalisation of the distribution force, leveraging the distribution channels of the institutional agents, micro marketing and segmented marketing. During the year, UTI plans to launch an open-end M.IP, an exchange traded fund and an innovative equity product which may offer investors an opportunity to enter and exit equity schemes profitably and timely. UTI also plans to launch the income option under UTI MMF and UTI Bond Fund that will provide tax efficient returns to investors. Retirement Benefit Plan, a notified pension plan under Section 88 of IT Act 1961, would now be making the monthly payment of pension through the system of partial repurchase.

The growth in GDP in India is revised at 5.2% as against expectation of 6-6.6% Government has, therefore just initiated several measures for higher public spending. Increase in credit off take of Banks and Financial Institutions, higher investment in infrastructure sector, restructuring of industry, encouraging Mergers and Amalgamations, quicker divestment of public sector enterprises and so on. Besides, substantial changes are being made in the regulatory framework for financial and economic sectors. The stock market reform measures are likely to bring about healthy development of the capital. market. Interest rates are in a low trajectory. All these measures are expected to reverse the Indian slow down and change gear for spurring development. These are indicators for a positive outlook.