No wonder, the absence of a reasonable exit route from closed-end funds has sounded their death knell even as the family of open-end funds, with facility for quick investment and redemption has made rapid strides. The convenience of exiting a fund is important for all investors since it gives them access to their investment in the hour of need. Further, the on to exit can be used by investors to express their dissatisfaction over the performance of a fund.

All the closed-end funds, which were launched in yesteryears, did offer liquidity by listing these funds on various stock exchanges. In other words, these funds were traded on the bourses. However, investors found this exit route blocked since most funds were hardly traded on the bourses.

Nonetheless, two funds have been an exception to the "lack of liquidity" syndrome - Morgan Stanley and UTI Mastershare. These funds, throughout their tenure, have been traded actively on the bourses and exiting them has seldom been a problem. But, that is only half of the problem. Like other closed-end funds, these funds have also traded at a steep discount to NAV. In other words, these closed-end funds can be sold only at a hefty discount to their intrinsic worth or net asset value. At times, the discount to NAV could be as high as 40 per cent, which means that an investor would get only Rs 6 though the actual worth of the unit is Rs 10.

The discount has, at best, only narrowed down with improving performance of the funds or on rumours of the funds going open-end. However, discount to NAV is not an exclusive feature of Indian markets but is a global phenomenon.

In most other markets, if the discount to NAV is substantial, the fund houses either buyback units from the market, thus pushing up the price or opt for a repurchase of units at a marginal discount to NAV.

UTI also recently announced its decision to buyback units in its Rs 850 crore offshore fund, India Growth Fund, which is listed on New York Stock Exchange. The fund is trading at a 40 per cent discount to its NAV. Thus, even Indian investors can take a cue from off shore investors and force the AMCs to take some remedial measure. The discount to NAV notwithstanding, both Morgan Stanley and Mastershare are well-diversified funds with a blend of growth and cyclical sectors. The large size of the two funds has only forced them to invest in large-cap, bluechip stocks. While these funds are unlikely to give you top-notch returns, they would be on a steady sail over the long-term. The steep discount makes these funds an attractive investment option for investors seeking a diversified equity portfolio. Currently, Morgan Stanley is trading at a price of Rs 11, which is at a 23% discount to its NAV. Similarly, Mastershare is trading at Rs 13.30, an 18% discount to its NAV of Rs 16.26.

Morgan Stanley
A 15-year fund, Morgan Stanley Growth Fund (MSGF) was launched in February 1994 and its units are in the compulsory dematerialised list. With a mobilisation of a whopping Rs 900 crore, the fund faltered immediately after its launch as the markets went into a tailspin.

The large asset base, spread across 340 scrips from the cyclical sector, became a performance deterrent in the long bear phase and took the fund below par. The restructuring in 1997 saw the fund consolidate its holdings with focus on stocks from software, pharma and FMCG. This, along with buyback of units, helped the fund shore up its NAV.

Since inception, the fund has bought back over 26 crore units, reducing the unit capital of the fund to Rs 714 crore from s 981 crore at inception. The fund breached its par value in January '99 and returned 138% during calendar 1999. The improved performance also reduced the gap between the NAV and the listed price.

The fund is currently well-diversified and spread across technology (26%), automobiles (11%), consumer goods (7.5%), financial services (65), services (6%), healthcare (5%) and engineering (5%). The fund is however, overweight on Infosys, which accounts for more than 20 per cent of the fund's investments. For the current calendar (till September 22), the fund has lost 30% owing to a sharp fall in ICE stocks earlier this year. Today, MSGF holds quality stocks that can yield reasonable returns in the long run. MastershareThe first Indian equity fund, Mastershare has provided a steady stream of annual dividends, the most recent being 16 per cent in May 2000. The fund has also given three bonus and two rights. Launched in September 1986, Mastershare has an enviable track record of giving an annualised return of nearly 22.71 per cent. Now due for redemption in 2003, Mastershare's performance is a proof of long-term investing in equities.

Mastershare has been fully into equities during the three bull phases and the interim troughs and has been able to outperform its benchmark in all market weathers. However, the huge size coupled with sluggish stock market performance has deterred the fund from keeping pace with its aggressive growth peers. The Rs 1633 crore fund has shown a penchant for growth stocks over the years with increasing concentration in top holdings. The top 10 stocks account for nearly 55% of net assets. While the fund had less than 10% exposure to technology in December 1998, the same was at 32% in June 2000. The fund is currently spread across other sectors with diversified interests (19%), consumer goods (13%), pharma (6%), energy (6%), metals (5%) and financial services (5%). While the fund lagged the broad markets during the 1999 surge of growth sectors, gaining 50% against 64% by Sensex, it limited its dowside movement during the ICE meltdown early this year.

The fund, with a healthy NAV, has a long track record of paying annual dividends, which is likely to be sustained. There is also a strong possibility of Mastershare going open-end, as has been the case with other closed-end funds of UTI. Mastershare offers an excellent investment opportunity for its attractive yield and appreciation of investments.