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UTI’s US-64 bond redemption – A BIG positive for the market?

Rs. 8000 Crores worth of US-64 bonds are up for redemption. Will this money flow to the stock market? Will it give a major boost to the indices? This article tries to find out.

Do you remember the Unit Scheme 64? No?? Does US-64 sound familiar? Yes??

Well, US-64 is India’s first (and therefore, the oldest) mutual fund scheme. As the name suggests, it was launched in 1964 by the Unit Trust of India (UTI). For many years, it was the only mutual fund option available to investors.

Even after the mutual fund space was opened up to private companies, US 64 was an investor favourite for a long time – probably because people were so used to investing with UTI!

But UTI had many assured return schemes – and since the returns were guaranteed, and were not market linked, the inevitable happened in 2002: The losses at UTI mounted so much that it has to be split into two entities – The Special Undertaking of UTI (SUUTI) and UTI Asset Management Company (UTI AMC).

And what happened to the US-64 investors? They were not allowed to redeem their units – instead, in 2003, they were issues five year bonds, which carried a 6.75%, tax free interest.

This was then – 2003.

Fast forward to today: It’s 2008 now, and these bonds are maturing. And what is the amount we are talking about? Around Rs. 8,000 Crores! Now, that’s a lot of money – Around $2 Billion!

Can you imagine what can happen if this money flows into the stock market? Well, let’s just say that it can bring a BIG smile on your face!

But is it possible – would this money come to the stock market?

This is the money that investors put into a mutual fund (US-64) in the first place. This means that the money was originally invested in stocks, and that the investors holding this money are not averse to investing in stocks.

Also, a lot has changed since 2003. The Indian stock markets have shot up, and it has been more-or-less established that India is on a long term growth path.

The recent market correction has made valuations attractive again. (To know more, please read “Stock Market Crash – What you should do now“)

And to top it all, UTI itself has been writing letters to these investors to convince them to reinvest this money in its own MF schemes. In fact, UTI has received more than 1,00,000 requests from these bond holders to invest back in UTI’s MF schemes!

Therefore, the investors who would be getting this money are more likely than not to invest it back into the stock market – either directly, or through mutual fund (MF) route.

So, in the coming days, expect a lot of money to flow into the stock markets. It wouldn’t come all at the same time – some of these bonds are still in the physical form – but a large portion of this Rs. 8,000 Crores would come to the markets for sure!

Do you hold US-64 Bonds?

And finally, are you one of the investors holding these US 64 bonds? If yes, please read “Don’t blow away a windfall“, and decide how you would like to invest / spend this amount.

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