Closed-end funds have been out of favour for many reasons, the principal reason being the huge mobilisation by creating unrealistic expectations in the minds of investors. This was followed by the market falling into a tight bear grip since end 1994, which prevails even today. This lead to a steep discount on these funds with their falling NAVs and a distress sale of units on the bourses.

Today, the case for investing in these funds is too compelling. These funds are ideally suited for long-term capital build-up. With a defined term, these funds are under no continuous pressure of inflows and redemptions. Hence, they are expected to deliver aboveaverage returns and investors can hope to get significantly higher yield till the time the fund comes up for redemption.

Mastershare: The first Indian equity fund was launched in 1986 and was extended for another term of 10 years once it became due for redemption in 1993. The fund till date has provided an uninterrupted annual dividend. The fund has also given three bonus and two rights.

Mastershare's performance is a proof of long-term investing in equities. Mastershare has been fully into equities during the three-frenzy bull phases and the interim troughs during its thirteen-year life span and has been able to outperform its benchmark in all market weathers. However, the huge size of the fund coupled with sluggish stock market performance has deterred it from keeping pace with its aggressive growth peers. Particularly in a year dominated by growth stocks, the fund has been a laggard. The low market capitalisation of software stocks has kept the fund away from participating in the infotech ledrally. Spread over 266 stocks, the Rs 1350 crore fund has a truly bluechip portfolio, which has substantial PSU holdings. The top ten account for nearly 49 per cent of net assets while top 30 accounts for 77 per cent.

The fund has a healthy NAV and despite the dividend tax of 10 per cent, the fund is likely to sustain the payout at 16 per cent. With the tax-break for open-end equity funds, Mastershare has a compelling reason to go open-end. Besides, with its impressive performance, there is unlikely to be a mass exodus from the fund - which could otherwise deter UTI from converting it into an open-end one.

Mastershare offers an excellent opportunity for investors with a medium-term perspective. Mastershare currently quote at Rs 12.25 against an NAV of Rs 16.14 yielding a discount of 24 per cent. For an investor who stays with the fund till its redemption in October 2003, the yield gets enhanced to 32 per cent.

Morgan Stanley Growth Fund: Launched in 1994, the fund was able to raise Rs 980 croreagainst a target of Rs 300 crore. Initially, the scramble for MSGF units was mainly because the fund was offered on a "first come, first served" basis. And eventually all investors were allotted units. So the fund which commanded a significant premium even before listing immediately disappeared. Investors' expectation were further hit with an unimpressive performance in a freely falling market.

The huge corpus raised at peak market levels became a significant deterrent to a focussed portfolio. Initially, the fund was spread over 350 mid and small-cap stocks. At its low in December, 1996, the fund's NAV was Rs 6.94. Consequently, the fund underwent a massive restructuring and substantial market buyback of its units.

MSGF has been able to significantly reduce the number of stocks to 100 with top 25 holdings accounting for 79 per cent of net assets. The fund is heavily into infotech, pharma and FMCG stocks which has lead to an improved performance. During the past one year, MSGF gained 47 per cent againsta negative 3.9 per cent for the Sensex. However, the market perception for the fund remains negative and the price of units has remained unmoved. Today, the MSGF portfolio is poised to outperform the market over the long-term. MSGF offers an excellent opportunity for investors with a long term perspective. The MSGF units currently quote at Rs 6.50 against an NAV of Rs 11.63, a steep discount of 44 per cent. For the long-term investor, this will translate into a yield of 79 per cent.

-- Value Research