Till recently, the concept of exchange-traded funds, a.k.a. ETFs, I mean the funds that are traded on the bourses just like stocks, was alien to open-end mutual funds at least here. Simply put, ETFs are hybrids, ''a cross between the open-end mutual funds and the closed-end funds that have traded on exchanges for decades'', well in the global markets. But that's catching on. Nifty BeES is the first open-end fund to trade on the Indian stockmarket. The idea: combine the advantages of a closed-end listed fund and an open-end index fund. Before your eyes pop out of sheer excitement and you call your broker let me tell you something: MFs listing on the Indian bourses isn't exactly new. Well, that's because there are several, though closed-end, funds that are listed on the bourses.
But that's not why I brought up the subject of ETFs. Today, I want to put before you the case of two funds that are unique from their listed brethren. Closed-end, equity diversified alright, but these funds, unlike others, are actively traded. They are: UTI's Mastershare and Morgan Stanley Growth Fund. Though closed-end funds are about to become extinct, they have an inherent advantage. Unlike open-end funds, they aren't subject to capital coming in and going out, which allows fund managers to manage assets appropriately. Since these funds are listed, liquidity is never an issue. But there's a drawback though: their price movement is dependent on the demand-supply situation and the market sentiment. So, if demand is higher than the supply, the units trade at a premium, but if supply exceeds demand, then they trade at a discount. Thus, despite they being liquid you may end up executing transactions at a price different from the NAV. Now, let us take a close look at both Mastershare and Morgan Stanley Growth Fund.
Mastershare: Launched in 1986, India's first equity diversified fund delivered an impressive total return of 18.18%. However, the 5-year trailing of -4.41% indicates that it has lost its charm. The reasons: perhaps a bloated size coupled with an uninspiring stockmarket performance. In the initial eight years the fund had clocked a whopping 48% return.
With an asset base of Rs 1,087.55 crore, the fund's portfolio comprises non-durables (21.87%), technology (15.15%), energy (14.41%), diversified (11.92%) and healthcare (8.95%). Its strategy of sticking to FMCG, technology and diversified has both been an advantage and a disadvantage. Though it posted a handsome 52% return in 1999, it lagged behind the category by 27 percentage points and the Sensex by 11 percentage points. However, during the tech debacle in 2000 it lost about 22%.
Due for redemption in October 2003, this fund has a good record of declaring dividends: from a low 4.38% dividend in 1987, to a high 20% in 1994. Last year, it doled out a 10% dividend. Also, it has given three bonuses and two rights. That apart, exiting this fund has been a non-issue since it's actively traded. Though it commanded a premium of 40% in its first year, today it trades at a discount (about 23%), making it a good buy. Buying it at a discount and redeeming it at the prevailing NAV then will surely fetch gains for the investors.
Morgan Stanley Growth Fund: Launched in 1994, this fund lost about 8% in the first three years. Right picks and a timely reduction of holdings has seen the fund deliver a 5-year trailing of 9.48%. Its YTD return is a good 10.07% against the category's 9.94%.
This fund started on a good note: against the expected Rs 300 crore, its IPO fetched Rs 980 crore. Soon the market fell and so did the fund. Starting 1997, the fund started buying back its units and its current asset size stands at Rs 785 crore. At present, the fund's investment in basic engineering has been reduced from 26% in 1997 to 5% now. Similarly, chemicals is down from 6% to 1.5%. On the other hand, exposure to energy and FMCG has gone up. In 1999, during the tech frenzy the fund delivered a stupendous 139% return. The fund, today, has a well-diversified portfolio: technology (14.34%), financial services (12.72%), FMCG (12.66%), auto (9.81%) and energy (8.87%).
In 1999, the fund declared its first dividend of 7.5%. Last year, it declared a 10% dividend. It's an actively traded fund, but usually at a discount (sometimes as high as 43%). Currently, it's trading at a discount of 26.35%. Still 7 years away from redemption, the fund may well be a good buy.
With this breed of funds becoming extinct, open-ended listed funds are set to take their place. However, till indexing becomes a mainstream investment in India, not much can be said about the future of such schemes. So, it doesn't leave much choice both for you and me but to wait and see which way these schemes go.