The hazy world of mutual funds
Wednesday, 8 December 2010
Shamsul Huq Zahid
Entrepreneurs and investors in Bangladesh have a built-in herd mentality. They tend to make beeline for anything that is initially found profitable. But their over-enthusiasm at times gives rise to creation of overcapacity leading to severe erosion in profitability and collapse of weaker enterprises in the long term.
However, indifference on the part of regulators/ official agencies concerned to caution against rash investment decisions either by entrepreneurs or investors or enforce laws and rules strictly is largely responsible for giving rise to unpalatable situation.
Such a development involving the floatation of closed-end mutual funds has taken place in the country only recently. Almost every commercial bank, non-banking financial institution and insurance company queued up for entering the mutual industry which once was an exclusive domain of the state-owned investment company, the Investment Corporation of Bangladesh (ICB).
The ICB floated eight small-size (between Tk.5.0 million and Tk. 50 million) close-end and one open-end mutual (unit) funds between 1980 and 1996. The funds proved to be huge success and the market capitalization of eight close-end mutual funds having the total size of Tk177.5 million stood at Tk 2.47 billion as of June 30 last. The unit holders of these funds have been receiving handsome dividends for year after year.
The Asset Management Company Ltd (AMCL), a subsidiary of the ICB, created some years back, has been floating both close-end and open-end mutual funds regularly. The size of the AMCL-managed close-end funds is also quite large, up to Tk 1.0 billion each. The Asset and Investment Management Services (AIMS), an asset management company, floated the first private sector mutual fund in 2000. It is also managing two more private sector funds, Grameen-1 and Grameen-2.
With the market remaining extremely bullish for over two years, there has been a rat race among the banks, NBFIs and insurance companies to float their own mutual funds despite the fact there exists a serious dearth of efficient and competent asset management companies to manage mutual funds. Yet the securities regulator has been rather lenient in issuing permission to float new mutual funds. The number of close-end mutual funds that are traded on bourses has shot up to 30 with a total size of Tk. 19.56 billion.
In fact, the number of mutual funds is not that big compared to many other regional countries, namely, India where mutual funds account for nearly 40 per cent of the total market capitalization of securities. Globally, mutual funds are popular among investors because of their risk-free nature.
But, apparently, there are some grey areas in the operations of the mutual fund industry of Bangladesh, mainly because of lack of enforcement of mutual fund rules, which are almost identical to rules framed by the Securities and Exchange Board of India (SEBI).
In fact, mutual funds have been, deliberately or otherwise, ignoring their accountability to investors. Investors of close-end funds do not know anything about the activities, including types of investments, except for their net asset value (NAV) that are published on weekly basis on the websites of the bourses and in some newspapers. But the mutual fund rules number 69 and 73 make it mandatory for the fund managers to publish a summary of investment activities and financial positions of the funds as advertisements in newspapers on annual and half-yearly basis.
The holders of open-end fund units are even denied of the information about the NAV. What they are usually able to know from the newspapers are the sale and purchase rates of the unit certificates from time to time.
Under rule 65 (2) of the mutual fund rules of 2001, an asset management company can claim an investment management and consultancy fee ranging between 1.0 per cent and 2.5 per cent, depending on the size of net asset value of the fund concerned. And the rule 65(3) allows an asset management company to recover from the fund the fees paid to trustee, bank charges, brokerage commission and expenditures related to marketing and sales.
But it is most likely that such expenditure limits are not followed by fund managers, in some cases. For instance, the ICB unit fund incurred a total expenditure, which includes provisions against investment, of Tk. 911 million in 2009-10 when its net investment in securities stood at Tk. 8.92 billion. By any measure, the size of the expenditure does appear disproportionately big.
It could be that lax enforcement of mutual funds rules has encouraged many financial institutions to be engaged in a rate race for floating mutual funds. The securities regulator is so much embroiled in managing other listed issues that it cannot give enough time to look after the interests of those who have put in their money in mutual funds. But to make the funds truly risk-free for investors, SEC should seriously enforce the rules concerned.
Entrepreneurs and investors in Bangladesh have a built-in herd mentality. They tend to make beeline for anything that is initially found profitable. But their over-enthusiasm at times gives rise to creation of overcapacity leading to severe erosion in profitability and collapse of weaker enterprises in the long term.
However, indifference on the part of regulators/ official agencies concerned to caution against rash investment decisions either by entrepreneurs or investors or enforce laws and rules strictly is largely responsible for giving rise to unpalatable situation.
Such a development involving the floatation of closed-end mutual funds has taken place in the country only recently. Almost every commercial bank, non-banking financial institution and insurance company queued up for entering the mutual industry which once was an exclusive domain of the state-owned investment company, the Investment Corporation of Bangladesh (ICB).
The ICB floated eight small-size (between Tk.5.0 million and Tk. 50 million) close-end and one open-end mutual (unit) funds between 1980 and 1996. The funds proved to be huge success and the market capitalization of eight close-end mutual funds having the total size of Tk177.5 million stood at Tk 2.47 billion as of June 30 last. The unit holders of these funds have been receiving handsome dividends for year after year.
The Asset Management Company Ltd (AMCL), a subsidiary of the ICB, created some years back, has been floating both close-end and open-end mutual funds regularly. The size of the AMCL-managed close-end funds is also quite large, up to Tk 1.0 billion each. The Asset and Investment Management Services (AIMS), an asset management company, floated the first private sector mutual fund in 2000. It is also managing two more private sector funds, Grameen-1 and Grameen-2.
With the market remaining extremely bullish for over two years, there has been a rat race among the banks, NBFIs and insurance companies to float their own mutual funds despite the fact there exists a serious dearth of efficient and competent asset management companies to manage mutual funds. Yet the securities regulator has been rather lenient in issuing permission to float new mutual funds. The number of close-end mutual funds that are traded on bourses has shot up to 30 with a total size of Tk. 19.56 billion.
In fact, the number of mutual funds is not that big compared to many other regional countries, namely, India where mutual funds account for nearly 40 per cent of the total market capitalization of securities. Globally, mutual funds are popular among investors because of their risk-free nature.
But, apparently, there are some grey areas in the operations of the mutual fund industry of Bangladesh, mainly because of lack of enforcement of mutual fund rules, which are almost identical to rules framed by the Securities and Exchange Board of India (SEBI).
In fact, mutual funds have been, deliberately or otherwise, ignoring their accountability to investors. Investors of close-end funds do not know anything about the activities, including types of investments, except for their net asset value (NAV) that are published on weekly basis on the websites of the bourses and in some newspapers. But the mutual fund rules number 69 and 73 make it mandatory for the fund managers to publish a summary of investment activities and financial positions of the funds as advertisements in newspapers on annual and half-yearly basis.
The holders of open-end fund units are even denied of the information about the NAV. What they are usually able to know from the newspapers are the sale and purchase rates of the unit certificates from time to time.
Under rule 65 (2) of the mutual fund rules of 2001, an asset management company can claim an investment management and consultancy fee ranging between 1.0 per cent and 2.5 per cent, depending on the size of net asset value of the fund concerned. And the rule 65(3) allows an asset management company to recover from the fund the fees paid to trustee, bank charges, brokerage commission and expenditures related to marketing and sales.
But it is most likely that such expenditure limits are not followed by fund managers, in some cases. For instance, the ICB unit fund incurred a total expenditure, which includes provisions against investment, of Tk. 911 million in 2009-10 when its net investment in securities stood at Tk. 8.92 billion. By any measure, the size of the expenditure does appear disproportionately big.
It could be that lax enforcement of mutual funds rules has encouraged many financial institutions to be engaged in a rate race for floating mutual funds. The securities regulator is so much embroiled in managing other listed issues that it cannot give enough time to look after the interests of those who have put in their money in mutual funds. But to make the funds truly risk-free for investors, SEC should seriously enforce the rules concerned.