You opened a fixed deposit scheme in a bank, say, six years ago. Now, it is matured. You go to the bank to withdraw the money. The banker says they are unable to give the money and interest. Moreover, they say they might give the money five years later. What will you think? Perhaps, a rush of adrenaline will flow with anger in your body.
Now, consider another case of Karim Saheb from a middle class family. He has a daughter who had been studying in class five in 2005. He bought a mutual fund in 2005 of Tk 200 thousand (2.0 lakh) with the expectation that it would provide a good return in future. Moreover, it would be sufficient for him to cover marriage expense after 10 years.
The fund he bought gave him bonus share not cash dividend. Moreover, the fund did not liquidate what it were supposed to do after 10 years (when the fund liquidates, all the funds money are refunded to fund holders). Karim Shaheb did not get any money in his pocket. Out of frustration, he sells entire holdings of the fund. Such a typical staggering situation prevails in the mutual fund sector.
The demand for mutual funds is very poor. Asset managers are not launching new fund as they fear less-than-full subscription during IPO (initial public offering).
Mutual funds are very popular investment in developed countries. People invest in those to get good return in form of cash dividend and capital appreciation. By a circular in 2013 by BSEC (Bangladesh Securities and Exchange Commission), mutual funds are eligible to issue bonus share instead of cash dividend. To my knowledge, such a provision is non-existent anywhere else in the world. It violates the saying - "Cash is king" and no money comes in the pocket of fund holders.
You may think fund-holders get capital appreciation. Well, the answer is - investors all over the world enjoy such benefit but in Bangladesh fund-holders are not privileged to get this basic right. When a closed-end fund (which has a fixed maturity) matures, the asset manager is bound to close the fund as per trust deed (which is the legal document). Then, the money is distributed to fund-holders at a price close to NAV (Net Asset Value).
Though we saw 1st BSRS mutual fund and 1st ICB AMCL mutual fund liquidated but Asset managers are complicating the existing rules to extend the tenor of exhausted funds. The funds which have matured but were not liquidated, are given in Table 1.
Now, if those funds were closed then one by one, fund-holders would get NAV immediately. Realising such benefit, market prices of other funds would move close to the NAV. That would be a win-win situation for both asset managers and fund-holders.
The difference between market price and NAV of the aforementioned funds is given in Table 2.
From the table 02, we see some funds are trading far below from their NAV for example Grameen1 is trading 35 per cent below the NAV. If this fund were liquidated, then fund-holders would immediately get capital gain of 35 per cent. Observing this benefit, investors would increase the demand of the funds and the prices of the funds will move close to NAV.
The question comes to mind: why are not these funds liquidating? One of the probable answers is: asset managers fear they would lose business if those funds were closed. Moreover, they influence the regulator to extend the tenor of the funds by another 5/10 years. By doing so, they are violating the basic contract - trust deed.
On the contrary, if the funds were closed, they would be benefited also. Investor's confidence to some extent will revive. Then asset managers can bring new IPOs also. Most importantly, this will bring discipline to the sector which is the most beneficial thing to do at the moment.
The writer is a Chartered Financial Analyst (CFA). maruf154@gmail.com
