The IIF conundrum

As they say, incomplete knowledge is worse than no knowledge...or something like that.

When I actively started investing about 2 years ago, I was convinced that index funds were the way to go. That was till the time I discovered ETFs and I ended up with a portfolio where 30% of my assets are Index funds and the rest is all in ETFs.

So, about a year and a half ago, when I purchased a bunch of IIF (Morgan Stanley India Investment Fund), my intention was to get a piece of the amazing growth and development that India has been observing and which is being reflected in the SENSEX reaching all time highs. The idea was right, but my execution a bit flawed as I realize that now.

So, without doing a lot of research, I sort of assumed that IIF is an ETF and the best way to get a good basket of strong Indian equities. The holdings included all the proven Large-caps and stayed away from the much more risky small-caps and IPOs that seemed to be going crazy over in India since the last few years. I figured having such a focused fund was risk enough.

Now, IIF is not an ETF, it is a close ended fund. Which, now that I am a little wiser (refer to the previous posts where I claim to be reading books), I believe is not what I was looking for. Here is why:
A closed-end fund looks, walks and talks like an ETF. The shares are listed on securities exchanges, are actively managed and trade intra-day on the open market. However, the price is not completely reflected by the total value of the underlying net assets (NAV) as is the case for ETFs. So these shares of closed-end funds can trade at premiums or discounts to their underlying NAVs. I believe this is reflected by the sentiment of the investors.

Most investors like this because it gives them an option to make their purchasing/selling decisions based on this property that the fund is either trading at a premium or a discount.

I started looking into this because I realized that the Indian market has recorded record-breaking gains over the last few months, but IIF isn't even close to its all time high. In fact, currently it is trading at a discount. Now, I would like to re-balance my portfolio and move this concentration on a country specific fund to someting a littler broader, I am looking at BLDRS Emerging Markets 50 ADR Index (ADRE).

I certainly would have done better being invested in something like ADRE which has a few excellent Indian stocks. Also, it has more concentration of the Asian/Pacific region and telecommunications as opposed to VWO (which I also own). I am debating if I should make the plunge, or wait for the investor sentiment to change (which I believe at some point it will and drive the IIF away from the 10% discount that it is currently trading at), or buy into an ETF that is already reflecting the NAV which is at recording breaking levels!

Apparently, I am obviously not the only one to have made this mistake. TheStreet.com explained this in a September 2005 article. Seems this is a common thing for single country investing!

Lesson learned?