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How to minimise risk when regulator demands more money into the bearish market?

MOHAMMAD MUFAZZAL | April 04, 2023 00:00:00

The recent regulatory decision to increase minimum investment by mutual funds from the existing 60 per cent to 80 per cent in the capital market will squeeze risk diversification opportunities and scope of generating profits, according to asset managers.

Against the backdrop of the present investment scenario, a fund manager would like to generate higher profits from the money market through risk-free investments.

For example, FDRs (Fixed Deposit Receipt) would ensure higher return on investments after the recent increase in interest rates. On the other hand, the capital market is highly volatile.

The bond market is not that big. And the stock market has been depressed, first due to the pandemic and then for the global economic distress caused by the Russia-Ukraine War.

To keep stocks from going into free fall, the Bangladesh Securities and Exchange Commission (BSEC) imposed floor price, lifted it and then re-imposed it.

A majority of stocks have not been moving up from floor prices for long due to a lack of buyers, turning assets illiquid. Mostly small-cap companies have been oscillating, pushing the index up and down in short spans of time.

The stock market, in its current form, entails high risk when it comes to return on investments.

Several asset managers, who spoke on condition of anonymity, said they think the existing 60 per cent minimum investment in the capital market kept room for better risk management.

"The scope of diversifying the MF's investments helps secure better profits. The new provision will narrow this scope," said an asset manager.

As per the new provision, the fund managers will have to invest at least 80 per cent of a fund into the capital market, with the remaining 20 per cent in the money market.

The present permissible limit for money market investment is 40 per cent of a mutual fund - both open end and close end.

The securities regulator on Thursday took the decision in principle to enhance institutional investors' participation in the capital market, which in turn is expected to boost the market.

The regulatory decision is yet to come into effect.

Meanwhile, the BSEC said special funds, such as pension funds, are not required to comply with the investment requirements.

Of the still existing 60 per cent mandatory investment, at least 50 per cent must be injected in listed securities.

If the capital market is stable, 60 per cent or 80 per cent investment does not matter much, fund managers said. But the minimum 80 per cent investment is worrisome in an unpredictable market.

However, officials of top asset management companies (AMCs) said they already had higher investments than what was needed to comply with the new provision.

Yawer Sayeed, managing director of AIMS of Bangladesh, said that above 90 per cent of their funds had gone to the capital market.

Around 80 per cent of the funds, except for one, managed by ICB AMCL have been invested in the capital market. ICB AMCL CMSF Golden Jubilee Mutual Fund is the only one fund that has 60 per cent of it in the capital market while the remaining 40 per cent in the money market, officials said.

Another leading asset management company LR global Bangladesh said it had diverted nearly 70 per cent of funds to the capital market.

IDLC Asset Management said it had poured around 70 per cent of its funds into the capital market.

BSEC Executive Director Mohammad Rezaul Karim is sceptical about what the asset managers claimed.

"No fund manager injected 80 per cent or 90 per cent of funds into the market. Some errors will be seen if they specify how they have made their calculations," Mr. Karim said.

He added that the capital market may see an additional investment of around Tk 1.5-2 billion on execution of the latest decision.

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