Investors' confidence in mutual funds is a much-talked-about issue in the country's capital market. The market experts are emphasising professionalism of the fund managers. Citing the examples of developed countries, they repeatedly focused on diverting retail investors to the mutual funds to avert their investment risks. The units of mutual funds are gifted to new bridegrooms and brides in neighbouring India. The marketing of mutual funds is observed even in remote areas of that country mainly because of investors' confidence in the fund managers and the regulatory framework.
In Bangladesh's context, what we see in the event of managing mutual funds by the fund managers is frustrating. The mutual fund sector is yet to stabilise regaining investors' confidence after the 2010-11 stock market debacle. The prices of the units of listed mutual funds had been below their respective net asset values for a long time after the stock market debacle. Presently, the prices of the units of many mutual funds are below their respective net asset value (NAV). For example, the price of a unit of the First Bangladesh Fixed Income Fund is below Tk 7, whereas the fund's net asset value (NAV) per unit is Tk 11.97 as of September 30, 2017.
The investors' confidence in mutual funds is so frail that the unit prices of most of the mutual funds fell even below their offer price of Tk 10 each. Presently, there are 36 closed-end mutual funds listed with the stock exchanges. Of them, the unit prices of 27 mutual funds are still below the face value of Tk 10 each.
Across the world, including the developed countries, small and less literate investors prefer or are inspired to invest in mutual funds managed by professional fund managers. Fund managers float a mutual fund with a commitment of giving return to unit holders.
The commitment of the fund managers is vividly mentioned in the securities rules. The tendency of some fund managers is that they realise management fees without giving desirable returns to the unit holders. Besides, they had convinced the securities regulator to introduce the provision of issuing stock dividend against units of mutual funds.
After the enactment of the provision of issuing stock dividend, some mutual funds are continuously issuing stock dividends. It's true that the stock dividend increases the number of units for unit holders. But they fail to gain by offloading units as the market prices of them are below their net asset value or even the face value. It is possible for an unit holder to realise return based on the net asset value during liquidation of the fund. But the number of investors having patience to wait until liquidation of the fund is insignificant.
On the other hand, the fund managers are being benefited as the dividend in the form of stock or re-investment unit (RIU) enhances the size of a mutual fund. The amount of management fee from a mutual fund depends on its size. A bigger size of a mutual fund ensures a bigger amount of management fee. That's why the provision of stock dividend for mutual funds did not bring any positive yield for the investors. Only the fund managers are benefited issuing stock dividend. That is totally conflicting to the spirit of fund management.
The Bangladesh Securities and Exchange Commission (BSEC) found other irregularities of fund managers relating to their investments. Two fund managers were found investing in restricted areas violating existing rules. In such a situation, the securities regulator had felt the necessity of bringing discipline in the mutual fund sector. It moved to bring another amendment to the rules of mutual funds.
The BSEC had approved some new provisions for the amendment at a meeting held on December 7, 2015. The securities regulator is yet to finalise the proposed amendment to the rules of mutual funds it had approved long back for bringing discipline in the sector. Following the meeting, a BSEC statement had said the draft provisions would be published in newspapers soon, seeking public opinion.
As per the proposed provisions, the regulator was supposed to fix the time of issuing RIU as dividend. The fees of the asset management companies (AMCs) and trustees were supposed to be restructured.
As per another proposed provision, a condition would be there providing for cutting the management fees, if the AMCs fail to give dividends. At the same time, the AMCs will be eligible for performance bonus if they could give cash dividends above stipulated rates, according to another proposed provision. The chief executive officer (CEO) of an AMC is also supposed to be appointed with prior consent from the BSEC. The regulator was also supposed to incorporate in the amendment a mandatory provision of publishing complete information about the fund in the greater interest of the investors. The regulator proposed to cut management fee of fund managers due to failure in issuing dividends.
Net Asset Value (NAV) of the MFs will have to be calculated daily, according to the draft amendment.
More than two years have already passed, but the regulator is yet to seek public opinion before giving final approval to the amendment. The market experts including one former chairman of the securities regulator criticised the BSEC stating that the regulator's credibility became under question due to the long delay in implementing the decision. "The regulator should either finalise or withdraw its decision explaining the reason," one former BSEC chairman observed.
In September, 2017 the BSEC officials concerned said they could not go ahead with the plan as they were busy doing other reform work.
The regulator said it would take two weeks to finalise the amendment to the MF rules after getting the public opinion. Let alone two weeks, two years have elapsed since the securities regulator approved the draft amendment to the rules of mutual funds. But it has not yet finalised the amendment taking public opinion into cognizance. Now the question is -- how many years will it take to finalise the amendment to the rules?
The writer is Staff Reporter at The Financial Express.
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