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Mutual Funds of Bangladesh
Mutual Funds of Bangladesh
Introduction
Mutual fund (MF) is a very useful investment mechanism in a capital market. A developed
capital market consists of varieties of investment instruments and mutual fund is one of them.
But the share of mutual funds in Bangladesh's capital market is very low. The market is fully
equity-based and there is little scope to introduce any new financial instrument. That's why a
rapid development has not happened in the mutual fund sector all. But mutual fund can be a good
investment alternative in this undiversified market.
A mutual fund is a type of professionally managed investment fund that pools money from many
investors to purchase securities. While there is no legal definition of the term mutual fund, it is
most commonly applied only to those collective investment vehicles that are regulated and sold
to the general public. They are sometimes referred to as Unit Fund, Collective Fund. Most
mutual funds of Bangladesh are close-ended; meaning a collective investment scheme that has a
fixed number of shares which are not redeemable from the fund and the shares can be purchased
and sold only in the market.
Table 1 shows that total 41 numbers of mutual funds are there in our capital market. ICB AMCL
was issued the highest 11 numbers of mutual funds followed by other issue managers.
According to prevailing participation of asset managers in our capital market, we see from the
Figure 2 that RACE Asset Management Company possessed about 45 per cent highest market
share of mutual funds compared to other issue managers based on their asset under management.
The finding also shows 12.25 per cent market share of manager to the issue goes to ICB AMCL
compared to ICB alone 5.5 per cent. If we consider both ICB and ICB AMCL then about 18 per
cent market share will be in their hands compared to other asset managers, which indicates third
position in our capital market for managing mutual funds based on asset portfolio. So, ICB
should exercise its expertise role in organising the mutual fund for the greater improvement of
our capital market.
capitalisation of DSE, mutual funds cascade only 1.92 per cent of its total market capitalisation,
which is very low.
It implies that promoters of mutual fund are very much reluctant for access to the capital market.
This may be due to the deficit of right kind of sponsors and decision makers in our country at the
right time for accelerating the mutual funds. So, it is time to float the MFs in our capital market
in the days ahead.
The Figure 3 shows the price earnings ratios of mutual fund over various periods of time in 2008
and 2009 were very high at 20.37 and 29.06 respectively compared to other years. In 2011, P/E
was very low i.e it was found at 6.24 compared to other years. The significant change of P/E was
not found. This indicates the mutual funds were also affected by market volatility.
P/E Ratio:
Data of last two years till now show that the P/E is being decreased compared to other years
showing the significant positive signal for investment in mutual funds. So, it can also be
concluded that higher the P/E is, the higher is the risk for investment and lower P/E will
minimize the risks.
Beat Inflation
Mutual Funds help investors generate better inflation-adjusted returns, without spending a lot of
time and energy on it.While most people consider letting their savings 'grow' in a bank, they
don't consider that inflation may be nibbling away its value.
Suppose you have tk.100 as savings in your bank today. These can buy about 10 bottles of water.
Your bank offers 5% interest per annum, so by next year you will have tk. 105 in your bank.
However, inflation that year rose by 10%. Therefore, one bottle of water costs tk. 11. By the end
of the year, with tk.105, you will not be able to afford 10 bottles of water anymore.
Mutual Funds provide an ideal investment option to place your savings for a long-term inflation
adjusted growth, so that the purchasing power of your hard earned money does not plummet over
the years.
Expert Managers
Backed by a dedicated research team, investors are provided with the services of an experienced
fund manager who handles the financial decisions based on the performance and prospects
available in the market to achieve the objectives of the mutual fund scheme.
Convenience
Mutual funds are an ideal investment option when you are looking at convenience and
timesaving opportunity. With low investment amount alternatives, the ability to buy or sell them
on any business day and a multitude of choices based on an individual's goal and investment
need, investors are free to pursue their course of life while their investments earn for them.
Low Cost
Probably the biggest advantage for any investor is the low cost of investment that mutual funds
offer, as compared to investing directly in capital markets. Most stock options require significant
capital, which may not be possible for young investors who are just starting out.
Mutual funds, on the other hand, are relatively less expensive. The benefit of scale in brokerage
and fees translates to lower costs for investors. One can start with as low as Rs. 500 and get the
advantage of long term equity investment.
Diversification
Going by the adage, 'Do not put all your eggs in one basket', mutual funds help mitigate risks to a
large extent by distributing your investment across a diverse range of assets. Mutual funds offer a
great investment opportunity to investors who have a limited investment capital.
Liquidity
Investors have the advantage of getting their money back promptly, in case of open-ended
schemes based on the Net Asset Value (NAV) at that time. In case your investment is closeended, it can be traded in the stock exchange, as offered by some schemes.
Higher Return Potential
Based on medium or long-term investment, mutual funds have the potential to generate a higher
return, as you can invest on a diverse range of sectors and industries.
Safety &Transparency
Fund managers provide regular information about the current value of the investment, along with
their strategy and outlook, to give a clear picture of how your investments are doing. Every form
of investment involves risk. However, skilful management, selection of fundamentally sound
securities and diversification can help reduce the risk, while increasing the chances of higher
returns over time
Expenses relating to formation of the Scheme shall not exceed 5% of the proposed Fund.
Total expenses (other than formation expenses) of the Scheme shall not exceed 4% of the net
asset value based on weekly averages.
The fees and expenditure related to a mutual fund to be incurred are given below:
Expenses relating to formation - Includes formation fee @ 1.0%, banker to issue fee @
0.10% of amount collected by the banks, post-issue expenditure (negotiable), expenses relating
to conduct lottery (at actual)
Scheme registration and annual fee Registration fee payable to SEC @ 0.20% of the fund
size and annual fee is @ 0.10% of the fund size or Tk 50,000 whichever is higher.
Management fee The Scheme will pay annual management fee to Prime Finance Asset
Management Company Limited on the basis of weekly average NAV of the Scheme as follows:
Trustee fee Presently market practice is between Tk. 5-10 Lac per year.
Custodial fee Presently market practice is @ 0.10% of the value of security.
CDBL fee Security deposit ranging from Tk 100,000 to Tk 500,000; IPO fee @ 0.025% on
issue amount; annual fee ranging from Tk 25,000 to Tk 100,000.
Listing fee initial listing fee upto Tk 100 million is @ 0.25% and above Tk 100 million is
@ 0.15%; annual listing fee ranging from Tk 10,000 to Tk 100,000.
Audit fee Negotiable.
Tobacco,
Weapons and defense, and
Entertainment (Hotels, casinos/gambling, cinema, pornography, music etc.).
3. After screening out companies with unacceptable primary business activities as mentioned
above the Fund may invest in shares of other companies if
the total debt of the investee company is equal to or less than 33% of the trailing 12
month average market capitalization of the company;
the sum of cash or interest bearing securities of the investee companies is less than or
equal to 33% of the trailing 12 month average market capitalization of the company;
the account receivable is less than or equal to 45% of the total assets of the company.
4. The Fund may also invest in other Shariah compliant instruments as and when they are
available for investment, specifically:
in participation term certificates, mudaraba certificates, musharika, murabaha, term
finance certificates and all other asset backed securities;
in contracts, securities or instruments of companies, organizations, and establishments
issued on the principles of Bai Muajjal, Bai Salam, Istisnaa, Mudaraba, Murabaha and
Musharika;
in the form of Riba-free cash deposits with Islamic banks or financial institutions with the
object of maintaining sufficient liquidity to meet the day to day requirement and to take
advantage of suitable investment opportunities as and when they arise; The Fund will not
involve in option trading or short selling or carry forward transactions.
in other instruments that may be allowed by the wewagvjv and the Shariah Law.
10. The Fund will not invest more than 25% of its total assets in shares, debentures or other
securities in any one industry.
2. Trustee Any bank or financial institution or any other limited company registered by the
SEC to act as Trustee.
Key role The Trustee is the guardian of the fund and holds all capital assets of schemes of the
Fund in trust on behalf of the unit holders.
The following are five registered trustees in our capital market:
1. Investment Corporation of Bangladesh (ICB) 2) Bangladesh General Insurance Company
Ltd. (BGIC), 3) Sandhani Life Insurance Co. Ltd.
5) Eastern Bank
Ltd.
3. Asset Management Company any bank or financial institution or any other limited
company registered by the SEC to act as an Asset Management Company.
Key role The Asset Management Company structures, operates and manages the schemes of the
Fund approved by the Trustee and the Commission and in accordance with the provisions of the
Trust Deed and the Rules.
At present there are 11 registered asset management companies in the market.
1) ICB Asset Management Company Ltd. 2) Bangladesh Development Bank Ltd 3) Assets &
Investment Management Services of Bangladesh Ltd. 4) RACE Management Private Company
Ltd. 5) LR GLOBAL Bangladesh Asset Management Company Ltd. 6) Prime Finance Assets
Management Company Ltd. 7) VIPB Asset Management Company Ltd. 8.
Alif Asset Management Ltd. 9) National Asset Management Ltd. 10) Invest Asia Capital and
Asset Management Limited. 11) Alliance Capital Asset Management Ltd.
4. Custodian any bank or financial institution or depository or any other limited company
registered by the SEC to act as Custodian; with special permission by the SEC the Trustee and
the Custodian can be the same institution.
Key role The Custodian keeps the securities of the Fund in safe custody.
There are four registered custodians in our capital market. These are as follows:
1) Investment Corporation of Bangladesh (ICB), 2) Standard Chartered Bank (SCB)
3) BRAC Bank Ltd. and 4) Citibank N.A
Few people know how to select securities, or have the time to do it. Mutual
funds are managed by professional money managersindividuals, teams or
investment management companieswho are trained in security selection
and portfolio management.
Defined Strategy
Every fund has a stated investment objective: growth; growth and income;
value; aggressive growth; small caps; and so on. Investors can choose a fund
that meets their investment objective, goal and risk-tolerance level.
Low Cost
Because of the economies of scale, mutual funds can transact business at a
much lower cost than individual investors, passing the savings on to the
shareholders.
Profit
In reviewing the advantages, investors should not overlook the benefit to the
other side: sponsors and sellers. Mutual funds are very profitable to their
sponsorsbrokerages and mutual fund companies. Selling them is a great
way to make a comfortable living for an army of stockbrokers, financial
planners, investment advisers and other professional peddlers.
Fierce competition forces mutual fund families to offer a fund of every flavor
to keep investors from leaving. There is just not enough talent to manage all
these vast pools of money. The end result: Mediocre performance,
inappropriate recommendations and frequent switching (inducing an investor
to sell a fund in one family to buy another fund in another family to generate
a commission) are common investor complaints.
Type of risk
1.
Market
risk
2. Liquidity
risk
3.
Credit
risk
4.
Interest
rate risk
5. Country
risk
Mutual funds invest in different securities like stocks or fixed income securities, depending upon
the funds objectives. As a result, different schemes have different risks depending on the
underlying portfolio. The value of an investment may decline over a period of time because of
economic alterations or other events that affect the overall market.Also, the government may
come up with new regulations, which may affect a particular industry or class of industries. All
these factors influence the performance of Mutual Funds.
Risk and Reward: The diversification that mutual funds provide can help ease risk by offsetting
losses from some securities with gains in other securities. On the other hand, this could limit the
upside potential that is provided by holding a single security.
Lack of Control: Investors cannot determine the exact composition of a funds portfolio at any
given time, nor can they directly influence which securities the fund manager buys.
inspected by Bangladesh Bank inspectors. Banks take deposits from the public and invest it in
loan products whereas the asset management companies raise money from the public for
investing mainly in the capital market. As investing in capital market is riskier than investing in
loans, monitoring of the mutual fund industry is at least as important as monitoring banks.
A simple question for the last - do we think mutual funds create value for its
investors?
Mutual funds definitely create value for investors and, therefore, they manage trillions of dollars
globally. Unfortunately, due to the challenges we mentioned, you can always argue that the
mutual fund industry in Bangladesh is not creating value for investors. But the solution is to
address the issues, not to shut down the industry.
The issue of Bangladesh Fund: Previously the government had decided to form an exclusive
mutual fund to conduct key trading in the market. In this regard, an open-ended mutual fund
titled 'Bangladesh Fund' was formed under the sponsorship of the Investment Corporation of
Bangladesh (ICB) and seven other state-owned banks. This fund formally started its operation
on May 05, 2011. Its target was to divest shares worth Tk 50 billion (5,000 crore).
But there arose a question as to how transparently and efficiently the mutual fund would be
managed, when the existing fund management was not that encouraging, particularly, when most
of the shares were overvalued. In the graph of the Dhaka Stock Exchange transactions moved in
a month in 2011 after announcement of the Bangladesh Fund package. So, the fund could not
help stabilize the market, rather it created an artificial demand in the market.
Finally, if you are a less risk-taker and long-term investor, you can consider investing in MFs.
Skilled managers are supposed to be involved in mutual fund management and they are supposed
to run the MFs based on extensive research work to minimize investors' risks by investing their
money in different shares.
To conclude, the main reason of the MF market lagging behind is that most of the funds are
close-ended. That means the MF shares mature in a specific period of time. Buying and selling of
open-ended MFs are different from those of close-ended MFs. The number of open-ended MFs
in the market is very small. There should be more open-ended MFs alongside the close-ended
ones. More MFs in the market can reduce the capital market's too much dependence on the
banking sector.
Conclusion
Mutual funds have emerged as the best in terms of variety, flexibility, diversification, liquidity as
well as tax benefits. Besides, through mutual funds investors can gain access to investment
opportunities that would otherwise be unavailable to them due to limited knowledge and
resources. Mutual funds have the capability to provide solutions to most investors needs,
however, the key is to do proper selection and have a process for monitoring and controlling. In
Bangladesh, the mutual fund industry is at a growing stage and it is incorporating a higher
number of new funds each year.
But sadly in respect of mutual fund management, Bangladesh stands nowhere close to the rest of
the world. Its not all about the relative smallness of the industry in Bangladesh. Its about the
regulatory environment, professionalism of the asset management companies and awareness of
the investors. Only a few years ago we saw an insane phenomenon in Bangladesh - mutual funds
trading at 200-300% premium to their NAVs.
Now things have somewhat reversed. Many closed-ended funds are trading now at 30-40%
discounts to NAVs. In Bangladesh the investors do not understand the funds or they do not trust
fund managers. So the investors lack of trust in the fund manager perhaps is the main reason
behind the current predicament of the industry.