Continuing its old practice of assured returns in a new avatar, UTI said redemption of MIP-1999 (II) units will be at net asset value or par (Rs 10 per unit), whichever is higher. ``In the event that the NAV at redemption is less than Rs 10 per unit, the shortfall will be made good from UTI's development reserve fund (DRF), which guarantees capital protection at maturity,'' UTI said in a statement here today. DRF was valued at Rs 850 crore as on June 30, 1999.

UTI was giving assured returns onits monthly income schemes till last year. However, SEBI was against giving assured returns as many mutual funds reneged on their commitments and backed out from paying assured returns. SEBI had to put its foot down and asked many including Canbank MF, IndBank MF and GIC MF to pay up the promised returns at the time of redemption.

Even the UTI was forced to dip into its reserves to pay dividend for Unit Scheme-64 last year. ``It is risky to make assured returns. When mutual funds put their money in stock markets and other avenues, it is not necessary that they should get high returns. In MIP-1999 (II), the UTI has offered a guaranteed return. It has assured repayment at NAV or Rs 10 whichever is higher. This makes a mockery of SEBI advices,'' said an investor.

UTI is the only mutual fund which guarantees this sort of a capital protection at maturity, unlike other funds where investors have to suffer capital erosion if the NAV falls below par. Unlike previous MIPs, where returns were assured for fiveyears, UTI has assured returns only for the first year at 10.5 per cent for the monthly option and 11 per cent for annual option. The interest rate for MIP (II) is 25 basis points lower than MIP (I), where UTI had assured an income of 10.75 per cent. The first MIP was a grand success and mobilised Rs 2,700 crore.

According to the UTI, MIP-1999 (II) is expected to get an encouraging response as the rate of distribution is attractive at 10.5 per cent (monthly) and 11 per cent (annual) for the first year. However, analysts do not share the optimism of UTI chief. The dividend will be tax-free in the hands of investors though UTI will have to pay 11 per cent dividend tax. Thus, the fund manager will have to earn at least 13.25 per cent after accounting for the dividend tax and investment management fee of 1 per cent.

In the first year, investors under all three options will be paid income distribution at 10.50 per cent upto October 31, 1999. But from the period November 1, income distributions under the annualand cumulative options will be 11 per cent for the first year. The income distribution being tax-free in the hands of the investors, the annualised yield works out to 16.45 per cent.

The scheme is for five years, upto October 2004 and for subsequent years, the coupon rates will be announced in March every year. The units will be listed in the wholesale debt segment of the National stock exchange latest by April 30, 2000 and investors have the option of exiting the plan from November 1, 2002 at NAV-based re-purchase price, the statement said.