If you are an old investor in UTI's Unit Scheme-1964, please mark May 31 on your calendar. For, by May 31, you will decide whether to stay with the scheme in its modified form or exit it.

Prima facie, both the options have their merits.

Let's look at what these options are: If you hold under 5,000 units, and you had invested in the scheme before June 30, 2001, you can exit the scheme and receive Rs 12 in May.

If you have more than 5,000 units, you can sell it back to UTI at Rs 10 a unit. Not bad, if you consider the underlying net asset value of just around Rs 6.

Of course, if you entered the scheme at a NAV-based price after June 2001, you can only exit at an NAV-based price.

The government is offering the first two categories of unitholders - those with up to 5,000 as in June 2001, and those with holdings above 5,000 - a chance to convert their units into tax-free bonds that will be redeemed after five years.

That is, they will be redeemed on May 31, 2008. However, it is too early to decide whether one should hold on or sell the units before May 31 since the government has not yet announced the actual interest rates on the tax-free, tradable bonds.

The indications are that it will offer yields slightly above those for five-year gilt-edged paper.

Going by current indications, the yield could work out to around six per cent if one opts for bonds instead of cash on redemption.

The finance ministry's main aim in this is to see that investors don't rush out of the scheme come May, since that would force it to pay out the money immediately. But that doesn't mean you should stay in the scheme.

Let's look at what you can do. If you are holding up to 5,000 units, you get Rs 12 for every unit worth around half that amount in terms of net asset value.

In this case, unless the tax-free bonds offer you a coupon rate of eight or nine per cent you would be better off taking your money and running.

Even a bank fixed deposit gives your six per cent, a post-tax return of just over four per cent. On Rs 12, you would receive annual interest of 72 paise, and after tax of 30 per cent, you get to keep 50 paise.

More if are in the lower income brackets. On the other hand, a tax-free six per cent on a bond issued at the NAV of Rs 6 works out to just 36 paise.

Deciding on the other option is dicier: you get only Rs 10 for units held above the 5,000 level.

Here, a 6 per cent tax-free rate is not too bad considering that interest on Rs 10 in a bank fixed deposit would get you just a little more - around 42 paise, post-tax, in the top tax bracket.

And since the bonds will be tradeable, you could even make some capital appreciation if a secondary market develops for these. Even here, though, it would be worth looking at comparable investments in tax-free PPF and Relief Bonds.

After the budget, a rethink!

Jaswant Singh's 2003-04 budget brings interest rates even lower than before.

This means two things: the actual yield on US-64 units converted to tax-free bonds could be even lower than we anticipate, unless the finance minister has the milk of human kindness overflowing inside him.

Barring such miracles, those who are entitled to Rs 12 per unit should clearly opt out. The Rs 10 exit cases should wait to see the yields offered before making up their minds.

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