Mutual fund (MF) investors are in a tight corner as almost all the listed funds witnessed significant price erosion in 2024, reflecting the broader downtrend in the stock market.
Except for one, all closed-end mutual funds saw price drops ranging from 5 per cent to 50 per cent year-on-year. Reliance One the first scheme of Reliance Insurance Mutual Fund, the only exception, surged 73 per cent.
As a result, the market capitalisation of the closed-end mutual funds shrank by Tk 13.66 billion, or 33 per cent, to Tk 27.81 billion in 2024.
What is more, of the 37 mutual funds listed on the Dhaka Stock Exchange, 34 are currently trading below their face value.
And only three mutual funds -- Prime Finance First Mutual Fund, Grameen One: Scheme Two, and Reliance One the first scheme of Reliance Insurance Mutual Fund -- are trading above their face value.
Market experts said the mutual fund industry, already grappling with policy challenges and a fragile market sentiment, is now enduring a big blow to its performance.
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. Depending on the profits earned, investors are then paid their share as dividends.
Investors have become increasingly reluctant to invest in mutual funds due to their poor financial performance for several years, low returns and mismanagement by some fund managers, said Akramul Alam, head of research at Royal Capital, a top-tier stock brokerage firm..
No dividend declaration from most funds for FY24 has further dampened investor sentiment, particularly among retail investors who have already lost faith in the sector, he added.
Moreover, there are allegations of fund mismanagement against some fund managers, which discouraged new investments.
Mr Alam pointed to several policy changes and scams that have contributed to the sector's decline. The extension of the tenure of closed-end mutual funds by 10 years in 2018 and fraudulent activities by some fund managers have severely impacted the mutual fund industry's reputation.
Fund managers, however, blamed a number of adverse factors, including price fall of well-performing stocks after the removal of the floor price and their obligation to keep 100 per cent provision against unrealised losses.
To minimise investment risks, fund managers tend to select blue-chip stocks while making investments. Most of the well-performing stocks faced price erosion after the removal of floor prices in January last year.
"As a result, the asset managers had rare opportunities to gain anything from the secondary market," said a leading fund manager who declined to be named.
Mutual funds' returns largely depend on how the stock market performs in a year as they earn from capital gains in stock trading, he said.
In 2024, the benchmark index of the Dhaka bourse plummeted 1,030 points or 16.5 per cent while the market-cap shed Tk 1.10 trillion in 2024.
The fund managers 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 added.
Hence, keeping provision against unrealised losses has become an obligation before considering dividend distribution to unit holders.
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.
The net asset value (NAV) that shows their ability to give dividends to the unit holders also dropped below their face value.
As a result, the closed-end mutual funds registered a portfolio loss of 16.70 per cent year-on-year, with the total asset under management (AUM) now reaching Tk 48.82 billion.
The NAV of 28 mutual funds, out of 37, went below their face value. Hence, they could not declare any dividend accordingly.
Bangladesh RACE Management is the industry leader, capturing 48.02 per cent asset under management (AUM) of closed-end mutual funds, followed by LR Global (16.21 per cent), ICB Asset Management Company (12.34 per cent), AIMS of Bangladesh (7.46 per cent) and Vanguard Asset Management (4.72 per cent).
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