Do you think a diversified equity fund would be a good buy if the Sensex was at 2600? If your answer is a resounding yes, as it surely should be, you need to take a close look at Morgan Stanley Growth Fund. You can pick up units of this fund from the stock markets for just Rs 11.05, a 25.83 per cent discount over its NAV of Rs. 14.90, which is roughly equivalent of buying in a market where the Sensex was just 2600. And mind you, the way the arithmetic of investment works, a discount of 26 percent actually means a gain of 35 per cent. Reason? If you were to buy something at Rs 11.05 and its actually worth Rs 14.90, that's an implicit gain of 34.84 per cent on your investment.
Of course, there's a fly in the ointment. Morgan Stanley Growth Fund is one of the last members of the now—rare species called closed-end mutual funds. The AMC itself will pay you the NAV only when the redemption date arrives and Morgan Stanley's redemption date is January 2009, still six years away. Like many other closed-end funds, MSGF provides liquidity by being listed on the stock exchanges. During the life of the scheme, these funds usually trade at a discount to the NAV. As the fund comes closer to its redemption date, this discount also falls.
As those who've been around funds for some years will agree, few private-sector funds in India have had as chequered a history as Morgan Stanley Growth Fund. The fund's IPO was held in December 1993 to massive public response. In the buyers' market that exists for investment products today, it's hard to believe that huge numbers of investors actually queued up to invest in the IPO. MSGF's IPO collected Rs. 982 crore, a sum that equity fund managers can only dream of today.
However, the fund's investors had a terrible time in the initial years. A good part of the corpus was frittered away on building a vast portfolio of stocks during the IPO boom of 1994. By 1996, the NAV had collapsed to just Rs 6.74. Then followed a couple of years of rebuilding the portfolio. Since 1997, MSGF performance has generally been in line with that of average open-end equity funds, except in 1998 when it outperformed the category strongly. This performance has given this giant fund a five-year trailing return of 14.62 per cent (as on August 6, 2003) as compared to 13.70 per cent of the category of open end diversified equity schemes.
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The portfolio overhaul has expunged the deadwood of the IPO boom and mainstream large-cap stocks now dominate. Though the fund still holds 54 stocks, the top ten account for 49 per cent of the portfolio. Most of these are big names like SBI, BHEL, Hero Honda and HLL. The 25 stocks which individually contribute to less than 1 per cent of NAV make up just 7.66 per cent of its portfolio now. Morgan Stanley is also diversified across sectors with financial services, FMCG and IT leading the way at 17.31 per cent, 14.06 per cent and 11.36 per cent of the portfolio respectively.
Of course, as with any closed-end fund, the big risk in MSGF is that liquidity comes at a heavy price. If you need your money back anytime during the next six years, you will be forced to sell your units on the stock markets at a discount to the NAV, just as the person who will sell to you today is doing. Still, while buying or selling a fund on the stock market is less convenient than doing so through a fund distributor, such transactions are no longer the nightmare they were in the pre-demat days.
However, unlike some listed closed-end funds of the past, you will definitely be able to sell as trading volumes are quite healthy. So, are you ready for some discount shopping?.
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