Mutual fund investors are in a tight corner as almost all close-ended mutual funds failed to declare any dividend for the unit holders for FY24 thanks to the depressed stock market.
Fund managers blamed a number of adverse factors for their failure to give any return for the year, including floor price, price erosion of well-performing stocks after the withdrawal of the price restriction, and their obligation to keep 100 per cent provision against unrealised losses.
As per the securities rules, mutual funds are required to invest at least 60 per cent of the money raised in stocks and listed bonds and the remaining 40 per cent in the money market.
Most of the fund managers injected up to 80 per cent of their funds in the capital market amid a scarcity of instruments in the money market with high yields.
A mutual fund is a professionally-managed collective investment scheme that pools money from investors and invests it in stocks, bonds and short-term money market instruments.
To minimise investment risks, fund managers tend to select blue-chip stocks while making investments. Most of the stocks had remained stuck on the floor in the first half of the financial year and then the stocks faced price erosion after the removal of floor prices in January this year.
"As a result, the asset managers had rare opportunities to gain anything from the secondary market," said Mir Ariful Islam, managing director & CEO of Sandhani Asset Management.
Mutual funds' returns highly depend on how the stock market performs in a year as they earn from capital gains in stock trading, said Mr Islam.
The fund managers also saw significant unrealised losses in their portfolios due to price erosion of a majority of well-performing stocks, particularly after the removal of floor price, he said.
Hence, keeping provision against unrealised losses has become an obligation before considering dividend distribution to unit holders.
EBL Securities identified 15 companies that were on the priority lists of fund managers, having looked into their funds' composition as of June this year.
The companies include Renata, Square Pharma, Grameenphone, BAT Bangladesh, Submarine Cable, and Beximco Pharma.
However, these stocks endured price erosion between 2 per cent and 45 per cent during the financial year, leading to erosion of the portfolios of MFs.
Meanwhile, the benchmark index of the Dhaka Stock Exchange (DSE) plummeted 1,016 points or 16 per cent while the market-cap shed Tk 1.10 trillion during the financial year.
MFs were expected to pay zero dividends as their net asset value (NAV) dropped below the face value, according to another fund manager.
The NAV of a mutual fund shows its ability to give dividends to the unit holders. When the NAV of a fund rises beyond its face value, it is more able to give dividends.
The NAV of 20 mutual funds out of 22, which published annual financial statements for FY24 as of Sunday, went below their face value. Hence, they could not declare any dividend accordingly.
Moreover, 20 mutual funds reported negative earnings per unit (EPU) for FY24.
Six close-ended mutual funds managed by industry leader Bangladesh RACE Management suffered a big blow as their losses soared 11 times year-on-year to Tk 3.53 billion in total for FY24.
The net asset value (NAV) of these funds fell far below their face value.
The funds are EBL First Mutual Fund, Trust Bank 1st Mutual Fund, IFIC Bank 1st Mutual Fund, 1st Janata Bank Mutual Fund, First Bangladesh Fixed Income Fund, and Exim Bank 1st Mutual Fund.
Of these funds, Trust Bank 1st MF, First Bangladesh Fixed Income Fund, and Exim Bank 1st MF respectively paid 5 per cent, 5 per cent, and 3 per cent cash dividends for FY23.
Preferring anonymity, a senior official of Race Management, said that instead of securing any income they incurred huge losses in the bearish market.
"How could we distribute dividends without making profits," he said.
The story is almost similar for almost all publicly-traded close-ended mutual funds.
Moreover, there are allegations of fund mismanagement against fund managers, including Race Management.
The zero dividends would have a negative impact on the market, as retail investors have already lost faith in mutual funds.
Only four mutual funds -- Prime Finance First Mutual Fund, Capitec Grameen Bank Growth Fund, Grameen One: Scheme Two, and Reliance One the first scheme of Reliance Insurance Mutual Fund trade at prices above the face value.
Among these, Grameen Mutual Fund One and Reliance Insurance Mutual Fund have declared 6.5 per cent and 4 per cent cash dividends respectively for FY24 as they have NAV per unit above the face value at the current market price of stocks.
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