Mutual funds: Hope and desperation

I still remember my first investment in stock market. It is so fondly remembered because the investment was done with the little savings I could manage from my scholarships. It was during my student life in Malaysia. And I still have the brochure of the Fund, the Kuala Lumpur Balanced Fund.
That is the beginning of the loving story of my enduring  relationship with mutual funds. Early in my career, I also had the opportunity to work as a founding team member for AIMS of Bangladesh, the first private sector asset management company of the country - with lots of hope and aspirations to see the sector thrive.
The melodrama in and around mutual funds thus hurts me. I have seen the 'irrational exuberance' of mutual funds during the bull-run. The investors treated them like stocks and bought at 5 to 6 times of net asset value (NAV). It took sometime to end the flight and then it landed. But the landing was rather a crash landing and now it was traded at deep discounts, even at 60.0 per cent discounts to NAV.
The dividends from funds that the investors counted to value mutual funds like stocks, backlashed. Most of the funds floated at the market peak are now having NAV below their face value and thus unable to pay dividends. That is having a catastrophic effect on the entire industry.
Another major setback was brought in by the industry players themselves. The introduction of bonus shares has made it impossible for the investors to value the scripts. Without a cash flow, it became impossible to value a financial instrument. It became like a black box. Even the holding reports are flouted with summing up at industry level and not showing the dubious investments in private limited companies.
Then came the mega drama of extension of maturity for the closed-end funds. The AMCs are not interested to give up the investors' money back at maturity and no regulations could deter them. And there is no wonder why the funds should not be traded at deep discounts.
While closed-end funds have so far seen its glorious days and then unfortunate dismal fall, their close cousin open-ended funds have not seen the rosy days yet. Nonetheless, some of their current practices are very difficult to comprehend. I am just unable to understand why open-ended funds in Bangladesh should have front-end loads and exit-loads while they can charge sales expenses separately. Mutual funds usually charge front-end loads and exit-loads to recover the selling and distribution expenses. And in our case, the loads are prohibitively high, as high as 10.8 per cent for a unit fund currently. And regulations allow a maximum 15.0 per cent discount to NAV. It is only the exit load. On top of it, there are management fees and other recurring expenses.
While some asset management companies (AMCs) are bitterly punishing the funds with charges, the global trend is to go for 'no-load' funds. Even in India, issuance expenses are to be borne by AMCs and front-end loads are prohibited. There is a little exit load of 1.0 per cent to cover the sales expenses as they have a huge country-wide sales networks. But most of the Index Funds or exchange traded funds (ETFs) are not load funds.
One might argue that there exists price risk and liquidity risk. But both can be significantly eliminated if NAVs are declared daily like India. And prices can move in both directions, up or down. And the residual liquidity risk will be borne by the fund and should be negligible for any small investor wanting to surrender his or her units.
I wonder why someone should invest in an open ended-fund where there is a huge penalty to exit. It's almost like a one-way ticket.
The writer is Managing Director, IDLC Investments Limited, the opinion expressed here does not represent the opinion of the
institute where he works. MZaman@idlc.com