First, a little history. Morgan Stanley is the first private sector mutual fund in the country. Today, when you look around and find more than a dozen private sector funds, that significance may not sink in. But in 1994, it was unmistakably significant. And the never-ending queues and rush of investors at the time of its IPO bear testimony to this fact.

However, a string of disastrous investments in duds like MS Shoes early on in its history put paid to the fund's credibility as a leading 'foreign mutual fund'. And very soon it was apparent that the fund wasn't really as great an investment as investors had first thought.

Lacklustre performance even during the bullish phases when peers did a lot better, added insult to injury. Of course, the fact that the fund was close-ended and its market price did not really reflect the net asset value made its performance look even worse.

Most investors in 1994 could not really distinguish an open-ended fund from a close-ended one and were ignorant of an important statistic -- majority of close-ended funds trade at a discount to their NAVs. If this fact was highlighted to investors in 1994, its anybody's guess how many of them would have invested in Morgan Stanley.

A decade later the fund evokes little enthusiasm within the investing community. A string of better-managed funds with a premium on performance now occupy the investor's mind share, relegating Morgan Stanley (net assets -- Rs 10.9 bn as on June 30, 2004) to the wilderness.

However, a lot of investors have now started looking at Morgan Stanley as an attractive investment opportunity because it trades on the stock exchange at a discount of 25.4% to its NAV (at the time of writing this article).

Our view on Morgan Stanley
To the fund's credit, its investment approach has improved discernibly. It has trimmed its portfolio over time and it now looks a lot healthier.

The portfolio is dominated by large caps and the top 10 stocks in its portfolio account for 42.0% of net assets, which is a good number for a diversified equity fund. However, that does not necessarily make Morgan Stanley a great investment opportunity for the following reasons:

1. Investors eyeing the 25% discount on Morgan Stanley must factor in the chance that this discount may remain till maturity in February 2009. So unless you are sure that you wish to stay invested for another 4 years (till maturity in 2009), it is not really all that smart an investment decision.

2. While evaluating an investment option, investors need to consider a lot of factors, cheap valuation being just one of them. Morgan Stanley's track record isn't too much to write home about. Over the last year, the fund has given a return of just 26.4%. Compare this to an aggressive equity fund like Franklin Bluechip (45.7%) or even a conservative fund like Sundaram Growth (42.4%) and we can understand why Morgan Stanley should not rank too high on investor preferences.

3. In a close-ended fund, the fund's performance isn't linked closely to its portfolio as there is a net asset value and a market price. There is usually a yawning gap between the two values, which explains the discount. Investors may find that even during a strong rally in stock markets, a fund backed by a great portfolio may still trade at a discount. In other words, investors will not be able to capture the benefit of the rally and a healthy portfolio unlike in an open-ended equity fund where investors can see direct benefits.

It is clear that investors need to look at more than the discount factor to consider investing in Morgan Stanley. As we have explained, a fund must have a lot more going for it than just attractive valuations. We believe now that there a host of other fund houses in the mutual fund space, existing and prospective investors need to consider investing in other, better-performing, open-ended diversified equity funds.

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