Morgan Stanley Mutual Fund launched an equity fund a long time ago (in January 1994). So in many ways Morgan Stanley A.C.E. Fund is its first launch for a lot of investors who either weren't investing in 1994 (since a majority investors have taken to mutual funds only over the last few years) or were too young to remember.

For investors in Morgan Stanley Growth Fund (MSGF), especially those who invested during the NFO stage, the latest NFO will no doubt again raise some sticky questions about Morgan Stanley Mutual Fund's track record in the country.

For those who came in late, MSGF (incepted in January 1994) was launched amidst great expectation. To an investing community that had been raised on funds from UTI (Unit Trust of India) and PSU (public sector unit) bank-sponsored fund houses, Morgan Stanley Mutual Fund seemed like a viable alternative.

For one, it was an international name, which to mutual fund investors starved of options looked like a surefire recipe for instant nirvana. Indian investors perceived that a fund house like Morgan Stanley Mutual Fund, unlike the government-backed fund houses of that time, would be managed differently.

For a change, investments would be made based on best practices and well-defined processes, traits that were (and still are) very rare.

Unfortunately, that was not to be. Investors did not get what they expected from MSGF; rather they got the exact opposite. Several issues went wrong with MSGF, most of which fall under the following:

1. Close-ended funds trading on the stock exchange (ETF- exchanged-traded fund) was (and still is) a big trend in developed markets like the US. Morgan Stanley Mutual Fund chose to replicate that trend in India. MSGF was launched as a 15-Yr close-ended equity fund that would be traded on the stock exchange.

However, one point that the fund house failed to impress upon its investors is that ETFs usually trade at a discount to the NAV (net asset value). So when investors saw this big disparity between the MSGF NAV and the stock exchange price, they could not fathom why (or how) the value of their MSGF investment was in the negative.

On its part, the fund house made little effort to educate the investor about how close-ended funds work and why there is a disparity between the NAV and stock exchange price.

2. The other thing that went wrong with MSGF is that in 1994 in the midst of the stock IPO frenzy, many investors were not literate enough to discern between a stock IPO and a mutual fund IPO (which were later re-named as 'new fund offers' - NFOs to dispel the confusion).

Many investors flocked to the MSGF IPO perceiving it as a stock IPO that would inevitably list at a premium. When MSGF did not display the same trait and instead did the reverse (i.e. traded at a discount to the NAV), investors simply could not understand why MSGF was trading at a discount on listing unlike other stocks that often listed at a premium.

Again, lack of investor awareness was the main reason behind this misconception and again unfortunately MSGF did little to dispel it.

3. While Point #1and Point #2 were about misconceptions, what damaged Morgan Stanley's credibility the most was bad fund management. In effect, the positive views that investors had heard/read about Morgan Stanley's well-defined investment processes and best practices turned out to be misconceptions.

For one, the fund's portfolio was so large it read like a directory of listed companies. And the large portfolio wasn't the only issue; the real problem was it had plenty of duds like MS Shoes for instance (investors of that era will recall the MS Shoes scam). It took the fund a while to trim its portfolio, but by all measures this was hardly the brand of fund management investors expected from an international name.

4. Another point that counted against MSGF was poor transparency/disclosure. Since it was a close-ended fund that traded on the stock exchange, Morgan Stanley Mutual Fund grew aloof from the investor (investors had to interact with the broker for buying and selling units and not the fund house).

Apart from the initial interaction at the time of the NFO, Morgan Stanley found little reason to go back to the investor since it had no plans to launch another fund. Unlike an open-ended fund, which can issue fresh units for fresh purchases and must therefore always stay in the investor's good books, a close-ended fund does not face the same imperative, especially if it does not plan to go back to the investor for some time with another offering.

So in a way Morgan Stanley could afford 'to switch off' or at least that's the impression it created in the minds of thousands of investors who felt abandoned.

5. Since MSGF was a close-ended fund, portfolio disclosure guidelines were relatively lax. Portfolios were not shared with investors as frequently as open-ended funds. Of course, the fund house could have chosen to declare its portfolio more frequently. The guidelines for portfolio disclosure impose the maximum and not the minimum frequency.

For instance, most open-ended funds today declare their entire portfolios every month, which makes it all very transparent; the guidelines however, do not compel them to do that. If MSGF had shared the complete portfolio with its investors more frequently, the red flag on its misconceived investments might have been raised earlier.

These were the issues plaguing MSGF for a long time. Over the years, some of them have been resolved and the stock market rally has taken care of the rest. Now, we are just one year away from MSGF's scheduled closure date (February 2009), although the fund house has applied for conversion into an open-ended fund. This means that once MSGF turns open-ended, existing investors will have the option to remain invested in the fund for as long as they want (and fresh investors can also invest in it).

Of course, between then and now, there is the Morgan Stanley A.C.E. Fund NFO (which closes on March 10, 2008), Morgan Stanley Mutual Fund's second offering. A lot of investors aren't sure whether they should be investing in it.

Some continue to be awed by the name, others are more hesitant given the bad experience with MSGF. Certainly, track record will always play an important role in determining investor choices and that is the way it should be. It also conveys something to the fund house - one big mistake and investors could switch off, for a change.