With the dividend in US-64 reduced, the fund managers expect the small investors -- the non-tax paying lot -- to move out of the scheme, while the institutional investors are likely to stay with the scheme, fund managers said. However, given the strength of the market at the current level, the brokers expect the market to absorb any selling pressure that may come from the UTI to meet its redemption pressure.

``The retired non-tax payers would move out of the US-64. The discerning urban investors have already moved into higher yielding low-risk investments. The trusts and charitable institutions would give it a second thought and move into gilt funds,'' says a fund manager.

"The non-tax paying population of US-64 is likely tomove out now. There are two reasons. One, the US-64 scheme has always been perceived as a risk free income scheme but this is now going to change. And second, the income that these non-tax paying population would now earn is very less compared to other investment avenues," said another fund manager.

UTI chairman P S Subramanyam claimed that US-64 had generated an income of over Rs 2,179 crore, sufficient to declare a dividend of 16.5 per cent. ``The board of trustees declared a dividend of 13.5 per cent by adhering to prudential norms and the current interest rates prevailing in the country,'' Subramanyam said.

``The 13.5 per cent dividend works out to an yield of only 10 per cent on the July sales price of Rs 13.50 per unit. This was below our expectations,'' said a fund manager, adding that there would be an outflow of funds from the US-64 scheme. ``It's disappointing. UTI should have declared a dividend of at least 16 per cent. Investors who bought US-64 unit last year would get a poor yield. There areother schemes which offer more interest rates,'' said Anand Divan, a leading stock broker.

Although the cut in dividend has reopened fears of some redemption pressure, UTI officials point out that it was the best return they could give in the current circumstances. ``The 13.5 per cent dividend is the best we could do. There may be some redemption pressure but the absence of any competitive investment avenues is likely to prevent investors from exiting the fund,'' said a UTI official.

According to an industry source, for the risk averse investor, preference would definitely be for relatively safer fixed income avenues like bank fixed deposits or bonds floated by financial institutions. "These securities typically give returns ranging from 12 to 14 per cent per annum for a five year period. Although the investor would have to pay tax on this investment he would have an assured return. If the investment is made in a cumulative scheme with interest compounded on a quarterly basis, annualised yields couldrange from 12.55 to 14.75 per cent. The risk associated with the US-64 scheme has increased in the minds of the investors but the retail investor would only gradually get out of UTI," he added.

The chief investment officer of a private sector mutual fund said that the market might get a jilt in the next couple of weeks. "We might see investors moving out of the US-64 scheme in a big way and UTI coming to market owing to redemption pressure. Investors would book profits at the US-64 counter and move to fund with better liquidity and giving good returns," he said.