US-64 is the only one to have justified the confidence of investors in terms of steady return and assured liquidity. Now the perception is that US-64 is on slippery ground. Investors had felt secure that US-64 had over the last 34 years built up a diversified portfolio of investments at an attractive average price. This gave the fund an advantage over newer mutual funds which took a beating from volatile share prices and fluctuating interest rates. Now the perception is that US-64 too is being singed by the weak share markets; their prospects are gloomy. US-64 has a fairly large exposure in equities. So it will not be possible for US-64 to garner trading profits as of yore. The bottomline is that since the share marketsare in the dumps, US-64 will not be able to pay a dividend of 20 per cent which translates into an yield of 14 per cent or so. The safe haven will not be as safe as it has been, because it cannot buck the weakness of the share markets. This has resulted in burgeoning sales of US-64 to UTI. But this compels US-64 to sell assets (shares, debentures, bonds) to cover repayments. The pressure of sales will bring down prices of financial instruments which are assets of financial intermediaries, led by the banks. They will thus be hurt. The incipient crisis will not be confined to UTI; it could spread to the financial system.

The finance ministry is reportedly toying with the idea of getting the banks to make a mega investment in US-64. In turn, UTI will invest what it gets in banks' bonds. The merit of this proposal is that it will tell the investor that banks consider US-64 a worthwhile buy. This could reverse ebbing confidence in US-64. Those now in a hurry to disinvest may ponder where to park funds;(unsecured FI bonds may not be as liquid). However, the swap deal (exchanging equivalent investment and income) will not add to the liquidity of US-64. Excluding the swap, the existing stock of US-64 will be served by the same portfolio of assets. What UTI needs is fresh capital from retail sales of US-64 on the strength of the existing assets. The issue is the strength of the assets, of equities in particular. US-64's weakness arises fundamentally from the poor shape of the secondary markets. This is not addressed by the proposed swap, a shell game, which Sebi may frown upon.