Personal Finance: Hidden Treasure

PERSONAL FINANCE
Hidden Treasure

Are close-ended funds a good bet? Shilpa Nayak thinks so.

Everytime the stockmarkets fall investors re-start their quest for innovative investing avenues. They don't expect much from these, only that they should provide reasonable returns over a period of time. Until last year, mutual funds, investors agreed, were it. But today most people who invested in them (and especially in their 'growth' varieties) are unhappy. That's still a shade better than the way investors in sector-specific schemes feel, downright miserable.

Succour comes from the most-ignored sibling of the fund-family, close-ended funds. If investors are indifferent to them, it isn't without reason: the holding-period is inordinately high. Indeed, the only close-ended schemes investors showed even a modicum of interest in were equity-linked ones that came with significant tax-benefits.

THE CLOSE-ENDED OPPORTUNITY

The Stake: Well-diversified close-ended schemes of mutual funds are a good long-term bet. But investors have a limited choice: Morgan Stanley and Master Share.
The Risk: The net asset value (NAV) and price of the unit will go down with the market. And in case investors need to liquidate, it will have to be at a loss.
The Strategy: Buy periodically. Understand that only an investment till the redemption of the scheme will pay, not an investment with a specific time horizon.

THE BIG TWO ON OFFER
Scheme	NAV (Rs)	Price (Rs)	Discount
UTI Master Share	10.34	7.65	35%
Morgan Stanley GF	9.44	6.50	40%

Today, close-ended schemes with diversified portfolios are available cheap. These schemes are a good investment bet for investors with a three-year perspective (at the very least) and looking to invest in markets through mutual funds. The timing couldn't be more right: close-ended schemes listed on the stock exchanges currently trade at a huge discount to their net asset values (NAVs). Take Morgan Stanley Growth Fund for instance. Its quoted price per unit on BSE is Rs 6.50, but the fund boasts a NAV of Rs 9.40 Some elementary arithmetic shows that the units are available at a 40 per cent discount.

An investor can buy fund-units from the market, hold them to maturity, and redeem them at par. The only problem is that there aren't too many close-ended schemes that are traded regularly on the bourses. The most frequently traded units belong to the close-ended funds of Morgan Stanley and UTI (Master Share), which are to be redeemed on January 2009 and October 2003, respectively.

Investors can't really go wrong if they pick well-diversified close-ended funds with redemptions at the end of three, five or more years. The logic? The performance of the schemes over next three to five years will be in line with that of the markets, which are expected to move up. Ergo, a redemption at par at the end of the tenure will result in attractive returns. And the current discount of 35-40 per cent is by far the highest these units have ever been available at. The caveat? Investors will benefit only if they hold the units to redemption.

Any attempt to liquidate the units before that will, as is obvious from what has already been said, result in a loss for investors. But if they're willing to hold on, there's no way they can end up on the losing side. Corny as it may sound if it's investor-nirvana you're looking for, it's worth waiting for redemption.

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