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MUTUAL MONITOR An open-and-shut case for the closed-end scheme. By Dhirendra Kumar
Yes. Because it could prove to be a bargain. Many closed-end schemes, which hold the same securities as their open-end cousins, trade for as little as 70 paise to a rupee. But, let me hasten to add, this is not like getting 30 per cent off on a suit at a sale. After all, you will be confronted by the same discount when you want to sell out of the scheme. Still, other things--performance, expense ratios, yields--remaining equal, I believe that a highly-discounted closed-end scheme may prove to be a better buy than an open-end scheme. Assume that the Unit Trust of India's (UTI's) open-end fund scheme, Mastergain, has a portfolio worth Rs 100 a unit, that a unit can be bought at Rs 100, and sold at marginally less than Rs 100 a unit. Assume that the UTI's closed-end fund, Mastershare, has a similar portfolio worth Rs 100 a unit, but is trading at Rs 70 a unit. And assume that the Net Asset Values (NAVs) of both Mastergain and Mastershare then double to Rs 200. If the discount stays at 20 per cent, their units will be trading at Rs 160 when you go to sell them in the market. Besides the brokerage, the capital gains would be the same in either case. So, either ways, you would double your money. Wait a moment. What if the fund manager throws in a Rs 20-dividend after expenses? That's a 20 per cent return on your investment in Mastergain, but a 29 per cent return on Mastershare! It is this that makes the closed-end scheme better than the open-end one. Well might you ask: how is it that a scheme can have a NAV of Rs 100, but trade at Rs 80? Simple. Open-end schemes buy back your units at the prevailing NAVs. But the closed-end schemes won't, and you can sell their units only for what other investors are willing to pay. If other investors are not too hot on your favourite closed-end scheme, they'll buy it only at a discount. To succeed in this game, you've got to buy when everyone is selling. And vice-versa. Now is a great time to buy. While getting into a closed-end scheme, don't look only at its performance; examine the discounts as well as the quality of its portfolio too. My personal rule-of-thumb: unless a scheme has outperformed a benchmark in each of the last three years, don't buy into it. Be it closed-end or open-ended. |
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Open or closed, it's the end that matters.
But should you buy into a closed-end fund scheme when every mutual fund is floating an
open-end scheme? 