Investment in mutual funds (MFs) is normally a more coveted means for investors who want to avoid risk. Ordinary investors who cannot read the stock market properly or who cannot do the research needed to understand the fundamentals of listed companies opt more for investment in mutual funds. They want to remain content with the average or better-than-average return from the professionally managed MFs.
But the situation is quite different in Bangladesh. Investors lost more money by investing in MFs than in other stocks. Some fund managers managed the funds so poorly that, instead of adding value to the investors' funds, they caused erosion of value of the money the investors initially provided them.
The net asset values (NAVs) in case of MFs are more important than the same in other stocks. NAVs represent the net values of stocks. In case of MFs, the same represents the market value of the funds' investment in stocks or similar investments including that in fixed deposit of banks allowed under regulation after meeting any provisioning required and also deduction of expenses allowable by the regulator.
In case of mutual funds, the pricing is normally done by the investors after taking into consideration the NAVs of the funds, the payment history and who manages the funds. Unfortunately, NAVs, a very important variable in MF pricing, in some cases are lower than the par values or issued values which are Tk.10. The investors wonder what caused fund managers to lose money with the NAVs pushed down below par value of the units when the MFs are enjoying some extra facilities including priority rights in the IPO subscription. They do not know why NAVs of their funds are so poor and what the trustees did to prevent erosion of values of the funds.
The investors even do not know who the trustees of the funds are, where they invested in and how many times in a year trustees met to take a stock of the performance of the fund managers. With naive trustees, the fund managers are almost free to do whatever they like to do, no matter whether those activities or decisions would go in favour of the interest of the investing public or not. MFs are to be deemed as trust funds in the sense that investors leave their funds by trusting the trustees.
The most important party in the case of MFs is the Asset Management Companies or fund managers. In Bangladesh's market, investors do not know which fund is being managed by which fund manager. In most cases, traders or investors trade in them blindly. MFs are primarily meant for absentee investors like professional people such as physicians and engineers, government officials and housewives. These are the investors who either cannot value stocks properly or cannot give sufficient time to understand the market and the values of the stocks. After an awful experience with their investment in the MFs, these groups of investors pulled their funds out almost wholly from such investments. Investments in MFs are now sought by other types of investors if they find the funds are going too cheap or yield rate on investments far surpasses the same in other stocks.
The regulator is also to be blamed for loss of confidence in the MFs. It was found to be yielding what had been asked for by MF managers. Permitting stock option in lieu of cash dividend was not taken positively by the investors. How many other stock markets are there in the world where stock options in lieu of cash dividend are allowed?
Most of the fund managers are now trying to convert the close-end funds into open-end ones. In the near future, Bangladesh's stock market will have more open-end MFs than the close-end MFs. The fund managers are very reluctant to refund money to the investors even after the expiry of the maturity dates. When the MF managers published prospectus for public subscription of their funds, they did not say or mention anything that at the end of maturity periods, they would try to convert the close-end funds into open-end ones. What is the motive behind such a move? Is it that they want to do something good to the investors or they just want to keep the scope of earning hefty fees for themselves for an indefinite period? Excepting the BDBL, no other fund manager has so far refunded the money to the investors after maturity of the close-end funds.
Can't the BSEC (Bangladesh Securities and Exchange Commission) ask the poorly performing fund managers to refund the money to the unit holders even before the time for liquidation arrives? MF investors are protected neither by the respective trustees nor by the regulator. After losing confidence, they decided not to invest any money afresh in any mutual fund. The whole MF industry has become so much discredited that no other fund manager will be able to launch another close-end MF by taking money from the public.
Does the BSEC, the regulator, understand that a permanent damage has already been done to the MF industry, especially to the close-end ones? Erosion of confidence level is so much that most of the MFs are being traded at 50 - 60 per cent discount to their NAVs whereas in a normal situation, MFs are to be priced at NAVs or slightly at discounted values to the NAVs. The regulator should observe what stock market regulators in other countries are doing with their mutual funds. If our regulator wants to help MF industry recover from the present state of investors' non-confidence, then it should bring changes in regulations that will adequately protect the interest of the investing public.
The writer is Professor of Economics, University of Dhaka. abuahmedecon@yahoo.com
Restoring confidence in mutual funds
Abu Ahmed | Published: August 27, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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