October 09, 2014

The wonder that was UTI

I can’t think of a better way to start this blog than with a tribute to the erstwhile Unit Trust of India.  While historians trace the roots of collective investment schemes in India to the 19th century (The Financial Association of India and China is regarded by some as the first investment trust in India), the establishment of the UTI in 1963 was the first serious attempt to mobilize savings from the masses and channelize these into securities.  T.T. Krishnamachari, the then finance minister, called it, “an adventure in small savings.”

Unfortunately, history, as documented by the media, hasn’t been kind to UTI.  For many people, their awareness or most vivid memory of this institution is the so-called scam of the late 1990s.  What is not known, or is forgotten, is the fact that UTI was a trailblazer in several areas.  In spite of enjoying a monopoly through the 70s and most of the 80s, it adopted practices and processes that were revolutionary.  At its peak, in the early 90s, it was a model for public-sector enterprises and the epitome of what an ideal fund house should be.  The times may have changed – the regulations, the markets, the products, financial awareness, distribution strategies – yet I truly believe that the UTI of the early 90s is still the gold standard by which fund houses should be measured.

Sadly, though, in the mid-to-late 90s, the top management at UTI lost sight of its strengths and combined with some questionable decisions, this served to unseat it from its near-unassailable position.

Here are a few, lesser-known facts about this remarkable institution:

  • Unit Trust of India was modeled on the unit trusts in the UK, and was the first unit trust in the public sector in the world.  (One source suggests that the direct inspiration was the 'Unit Trust of England'.  I haven’t been able to get my hands on any evidence that there was indeed such a unit trust.)  
  • The term ‘mutual fund’ was introduced in India in 1986, with the launch of Mastershare, the first pure-equity scheme by UTI.
  • UTI was the pioneer of regular monthly income schemes in India, even before the Post Office introduced its popular monthly income scheme.  UTI started offering these in 1982 whereas the Post Office started offering these in 1987.
  • UTI promoted/ co-promoted a number of financial institutions including CRISIL, ICRA, CARE, NSDL, SHCIL and IL&FS.
  • Before SEBI brought in regulations for mutual funds, UTI and other mutual funds were free to assure returns to investors.  For its debt-oriented funds (which typically, had a slice of equity), UTI assured market-competitive returns, yet established a track record of giving investors much more than what it assured.  In one assured monthly income scheme, at the end of the 5 year tenure, UTI gave investors, over and above the assured 12%+ p.a., a bonus of 40%.

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