Mutual Fund

Introduction

Mutual fund (MF) is a very useful investment mechanism in a capital market. A developed
capital market consists of varieties of investment instruments and mutual fund is one of them.
But the share of mutual funds in Bangladesh's capital market is very low. The market is fully
equity-based and there is little scope to introduce any new financial instrument. That's why a
rapid development has not happened in the mutual fund sector all. But mutual fund can be a good
investment alternative in this undiversified market.

A mutual fund is a type of professionally managed investment fund that pools money from many
investors to purchase securities. While there is no legal definition of the term mutual fund, it is
most commonly applied only to those collective investment vehicles that are regulated and sold
to the general public. They are sometimes referred to as Unit Fund, Collective Fund. Most
mutual funds of Bangladesh are close-ended; meaning a collective investment scheme that has a
fixed number of shares which are not redeemable from the fund and the shares can be purchased
and sold only in the market.
What is mutual Fund?

It is an investment vehicle that is made up of a pool of funds collected from many investors for
the purpose of investing in securities such as stocks, bonds, money market instruments and
similar assets. Mutual funds are operated by money managers, who invest the fund's capital and
attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus.

According to basic financial theory an investor can reduce his risk by holding a portfolio of
assets instead of only one asset. This is because by holding all your money in just one asset, the
entire fortunes of your portfolio depends on this one asset. By creating a portfolio of a variety of
assets, this risk is substantially reduced. No Mutual fund investments are totally risk free. In fact,
investing in mutual funds bears the same risk as investing in the equities, the only difference is
that due to professional management of funds the controllable risks are substantially reduced.

Brief history of mutual fund market in Bangladesh

In 1980, the Investment Corporation of Bangladesh (ICB) became the pioneer in launching
mutual funds in the capital market in the country. It was a milestone step for investors in our
capital market. The then first private organization, AIMS, evolved its professional mechanism in
1999 for organizing mutual funds in Bangladesh. Mutual funds grew slowly over the period of
time and had only been close-ended since beginning of its operation in the capital market.

In 2010, also the first-ever open-end mutual fund was floated in the capital market by the Prime
Finance Asset Management Company and after that, various mutual funds came to the market
and mainly operated under the BSEC (Mutual Fund) Rules-2001, Trust Act, 1882 and
Registration Act, 1908. Mutual funds pool money of both individual and institutional investors
allowing the funds to achieve the economies of scale by reducing costs and increasing
investment returns, divisibility and diversification, prudent management for stock picking and
timing, reinvestment of dividends, interest and capital gains, tax efficiency and flexibility of
trading system with a view to fulfilling the objectives of diversifying the risks and to earn
maximum returns.

Functions of mutual fund/ Types of mutual fund in Bangladesh

Bangladesh has a very small market for mutual funds. As of 2015, there were 41 mutual funds in
the country's capital market. For them, mutual fund rules were framed by the Securities and
Exchange Commission (SEC). Under the rules, a fund consists of one sponsor/entrepreneur, one
trustee and obviously a fund manager. It is required for every such company to get permission of
the SEC before proceeding with its fund allocation process.

Currently there are two types of mutual fund in Bangladesh;

a) Open-Ended Mutual Fund(93% of Funds):

Open-end mutual funds must be willing to buy back their shares from their investors at the end
of every business day at the net asset value computed that day. Most open-end funds also sell
shares to the public every business day; these shares are also priced at net asset value. A
professional investment manager oversees the portfolio, buying and selling securities as
appropriate. The total investment in the fund will vary based on share purchases, share
redemptions and fluctuation in market valuation. There is no legal limit on the number of shares
that can be issued in Bangladesh.

b) Close-Ended Mutual Fund (3 % of Funds):

A closed-end fund has a stipulated maturity period which generally ranging from 5 to 10 years.
Closed-end funds generally issue shares to the public only once, when they are created through
an Initial Public Offering (IPO). Their shares are then listed for trading on Dhaka stock
exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the
fund (as they can with an open-end fund). Instead, they must sell their shares to another investor
in the market; the price they receive may be significantly different from net asset value. It may
be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more
commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A
professional investment manager oversees the portfolio, buying and selling securities as
appropriate.
Formation of mutual fund:
As per the security exchange commission bidhimala, 2001 a mutual fund is formed as a Trust
under Trust Act, 1882 and the Trust Deed is to be registered under Registration Act, 1908.
Before registration of the Trust Deed it has to be approved by the Securities and Exchange
Commission.

Why do we need it?

 Beat Inflation

Mutual Funds help investors generate better inflation-adjusted returns, without spending a lot of
time and energy on it.While most people consider letting their savings 'grow' in a bank, they
don't consider that inflation may be nibbling away its value.

Suppose you have tk.100 as savings in your bank today. These can buy about 10 bottles of water.
Your bank offers 5% interest per annum, so by next year you will have tk. 105 in your bank.

However, inflation that year rose by 10%. Therefore, one bottle of water costs tk. 11. By the end
of the year, with tk.105, you will not be able to afford 10 bottles of water anymore.
Mutual Funds provide an ideal investment option to place your savings for a long-term inflation
adjusted growth, so that the purchasing power of your hard earned money does not plummet over
the years.

 Expert Managers
Backed by a dedicated research team, investors are provided with the services of an experienced
fund manager who handles the financial decisions based on the performance and prospects
available in the market to achieve the objectives of the mutual fund scheme.

 Convenience

Mutual funds are an ideal investment option when you are looking at convenience and
timesaving opportunity. With low investment amount alternatives, the ability to buy or sell them
on any business day and a multitude of choices based on an individual's goal and investment
need, investors are free to pursue their course of life while their investments earn for them.

 Low Cost

Probably the biggest advantage for any investor is the low cost of investment that mutual funds
offer, as compared to investing directly in capital markets. Most stock options require significant
capital, which may not be possible for young investors who are just starting out.

Mutual funds, on the other hand, are relatively less expensive. The benefit of scale in brokerage
and fees translates to lower costs for investors. One can start with as low as Rs. 500 and get the
advantage of long term equity investment.

 Diversification

Going by the adage, 'Do not put all your eggs in one basket', mutual funds help mitigate risks to a
large extent by distributing your investment across a diverse range of assets. Mutual funds offer a
great investment opportunity to investors who have a limited investment capital.

 Liquidity

Investors have the advantage of getting their money back promptly, in case of open-ended
schemes based on the Net Asset Value (NAV) at that time. In case your investment is close-
ended, it can be traded in the stock exchange, as offered by some schemes.

 Higher Return Potential

Based on medium or long-term investment, mutual funds have the potential to generate a higher
return, as you can invest on a diverse range of sectors and industries.

 Safety &Transparency
Fund managers provide regular information about the current value of the investment, along with
their strategy and outlook, to give a clear picture of how your investments are doing. Every form
of investment involves risk. However, skilful management, selection of fundamentally sound
securities and diversification can help reduce the risk, while increasing the chances of higher
returns over time

Minimum size of mutual fund

According to the security exchange commission bidhimala , 2001 the minimum size of any
mutual fund - for open-end mutual fund is Tk 60 million while for close end mutual fund is Tk
30 million. In both cases the Sponsor has to subscribe minimum 10% of the total fund.
However, the SEC published an amendment to the said bidhimala for public opinion mentioning
minimum size of a mutual fund is Tk 500 million.

Fees and expenditures

Limitation of expenses:
 Expenses relating to formation of the Scheme shall not exceed 5% of the proposed Fund.
 Total expenses (other than formation expenses) of the Scheme shall not exceed 4% of the
net asset value based on weekly averages.

The fees and expenditure related to a mutual fund to be incurred are given below:
 Expenses relating to formation - Includes formation fee @ 1.0%, banker to issue fee @
0.10% of amount collected by the banks, post-issue expenditure (negotiable), expenses
relating to conduct lottery (at actual)
 Scheme registration and annual fee – Registration fee payable to SEC @ 0.20% of the
fund size and annual fee is @ 0.10% of the fund size or Tk 50,000 whichever is higher.
 Management fee – The Scheme will pay annual management fee to Prime Finance Asset
Management Company Limited on the basis of weekly average NAV of the Scheme as
follows:

 Trustee fee – Presently market practice is between Tk. 5-10 Lac per year.
 Custodial fee – Presently market practice is @ 0.10% of the value of security.
 CDBL fee – Security deposit ranging from Tk 100,000 to Tk 500,000; IPO fee @
0.025% on issue amount; annual fee ranging from Tk 25,000 to Tk 100,000.
  Listing fee – initial listing fee upto Tk 100 million is @ 0.25% and above Tk 100 million
is @ 0.15%; annual listing fee ranging from Tk 10,000 to Tk 100,000.
 Audit fee – Negotiable.

Investment policy (subject to approval of Shariah Board) :

1. The Fund can invest in both listed and non-listed securities.

2. The Fund can invest in the shares of the companies whose basic businesses are in consistence
with the Shariah Law. Although no universal consensus exists among contemporary Shariah
scholars on the prohibition of companies, most Shariah boards have advised against investment
in companies involved in the activities of:
 Conventional banks, insurance and leasing companies,
 Alcohol,
 Pork related products,
 Tobacco,
 Weapons and defense, and
 Entertainment (Hotels, casinos/gambling, cinema, pornography, music etc.).

3. After screening out companies with unacceptable primary business activities as mentioned
above the Fund may invest in shares of other companies if
 the total debt of the investee company is equal to or less than 33% of the trailing 12
month average market capitalization of the company;
 the sum of cash or interest bearing securities of the investee companies is less than or
equal to 33% of the trailing 12 month average market capitalization of the company;
 the account receivable is less than or equal to 45% of the total assets of the company.
 4. The Fund may also invest in other Shariah compliant instruments as and when they are
available for investment, specifically:
 in participation term certificates, mudaraba certificates, musharika, murabaha, term
finance certificates and all other asset backed securities;
 in contracts, securities or instruments of companies, organizations, and establishments
issued on the principles of Bai’ Mu’ajjal, Bai’ Salam, Istisna’a, Mudaraba, Murabaha and
Musharika;
 in the form of Riba-free cash deposits with Islamic banks or financial institutions with the
object of maintaining sufficient liquidity to meet the day to day requirement and to take
advantage of suitable investment opportunities as and when they arise; The Fund will not
involve in option trading or short selling or carry forward transactions.
 in other instruments that may be allowed by the wewagvjv and the Shariah Law.

Investment restriction as per Securities& Exchange commission (Mutual

Fund) Bidhimala, 2001
1. Money to be collected under the Fund will be invested in encashable/transferable securities
whether in capital market or money market, privately placed debentures, preferential shares or
securitized debts and assets.
2. Not less that 75% of the total assets of the fund will be invested in capital market.
3. Not more than 25% of the total assets of the fund will be invested in Fixed Income Securities
(FIS).
4. Not more than 15% of the total assets of the Fund will be invested in Pre-IPOs at one time.
5. All investment will be made in the name of the Fund.
6. The Fund will not buy its own unit.
7. The Fund will not invest more than 10% of its total assets in any one particular company’s
shares/debentures.
8. The Fund will not invest more than 15% of any company’s paid-up capital.
9. The Fund will not invest more than 20% of the fund in shares, debentures or other securities of
a single company or group.
10. The Fund will not invest more than 25% of its total assets in shares, debentures or other
securities in any one industry.
Who participates in the market?

There are four parties involved in floatation of a mutual fund namely:

1. Sponsor – Any bank or financial institution or any other limited company who initiates the
fund by subscribing minimum 10% of total fund size.
Key role– The Sponsor constitutes the fund by virtue of Trust Deed.
 Sponsor will appoint trustee, custodian and asset manager.

2. Trustee – Any bank or financial institution or any other limited company registered by the
SEC to act as Trustee.
Key role– The Trustee is the guardian of the fund and holds all capital assets of schemes of the
Fund in trust on behalf of the unit holders.
 The following are five registered trustees in our capital market:
1. Investment Corporation of Bangladesh (ICB) 2) Bangladesh General Insurance Company
Ltd. (BGIC), 3) Sandhani Life Insurance Co. Ltd. 4) Brac Bank Ltd. and 5) Eastern Bank
Ltd.

3. Asset Management Company – any bank or financial institution or any other limited
company registered by the SEC to act as an Asset Management Company.
Key role– The Asset Management Company structures, operates and manages the schemes of the
Fund approved by the Trustee and the Commission and in accordance with the provisions of the
Trust Deed and the Rules.
 At present there are 11 registered asset management companies in the market.
1) ICB Asset Management Company Ltd. 2) Bangladesh Development Bank Ltd 3) Assets &
Investment Management Services of Bangladesh Ltd. 4) RACE Management Private Company
Ltd. 5) LR GLOBAL Bangladesh Asset Management Company Ltd. 6) Prime Finance Assets
Management Company Ltd. 7) VIPB Asset Management Company Ltd. 8.
Alif Asset Management Ltd. 9) National Asset Management Ltd. 10) Invest Asia Capital and
Asset Management Limited. 11) Alliance Capital Asset Management Ltd.

4. Custodian – any bank or financial institution or depository or any other limited company
registered by the SEC to act as Custodian; with special permission by the SEC the Trustee and
the Custodian can be the same institution.
Key role – The Custodian keeps the securities of the Fund in safe custody.

 There are four registered custodians in our capital market. These are as follows:
1) Investment Corporation of Bangladesh (ICB), 2) Standard Chartered Bank (SCB)
3) BRAC Bank Ltd. and 4) Citibank N.A

Goal of the market

The goal of mutual funds, like any for-profit enterprise, is to provide a product or service people
need, for a fee. Mutual funds provide several important benefits to small investors:
diversification, professional management, strategy, low cost, access to specific markets and ease
of investing. Most importantly, they help investors achieve their financial objectives by making
them money.

Diversification
The benefits of diversification are well known: to protect against individual security risk. Mutual
funds pool investors’ money and invest in a diversified portfolio of stocks and/or bonds to
minimize risk.

Professional Management
Few people know how to select securities, or have the time to do it. Mutual funds are managed
by professional money managers—individuals, teams or investment management companies—
who are trained in security selection and portfolio management.

Defined Strategy
Every fund has a stated investment objective: growth; growth and income; value; aggressive
growth; small caps; and so on. Investors can choose a fund that meets their investment objective,
goal and risk-tolerance level.

Low Cost
Because of the economies of scale, mutual funds can transact business at a much lower cost than
individual investors, passing the savings on to the shareholders.

Profit
In reviewing the advantages, investors should not overlook the benefit to the other side: sponsors
and sellers. Mutual funds are very profitable to their sponsors—brokerages and mutual fund
companies. Selling them is a great way to make a comfortable living for an army of
stockbrokers, financial planners, investment advisers and other professional peddlers.

Fierce competition forces mutual fund families to offer a fund of every flavor to keep investors
from leaving. There is just not enough talent to manage all these vast pools of money. The end
result: Mediocre performance, inappropriate recommendations and frequent switching (inducing
an investor to sell a fund in one family to buy another fund in another family to generate a
commission) are common investor complaints.

Risk involved in that market

The level of risk in a mutual fund depends on what it invests in. Usually, the higher the potential
returns, the higher the risk will be. For example, stocks are generally riskier than bonds, so an
equity fund tends to be riskier than a fixed income fund.

Some specialty mutual funds focus on certain kinds of investments, such as emerging markets, to
try to earn a higher return. These kinds of funds also tend to have a greater risk of a larger drop
in value.

Type of risk Type of investment affected

How the fund could lose money
1. Market All types The value of its investments decline because of
risk unavoidable risks that affect the entire market
2. LiquidityAll types The fund can’t sell an investment that’s
risk declining in value because there are no buyers.
3. Fixed income securities
Credit If a bond issuer can’t repay a bond, it may end
risk up being a worthless investment.
4. Fixed income securities
Interest The value of fixed income securities generally
rate risk falls when interest rates rise.
5. Country Foreign investments The value of a foreign investment declines
risk because of political changes or instability in the
country where the investment was issued.
6. Currency Investments denominated in a If the other currency declines against the
risk currency other than the Canadian dollar, the investment will lose value.
Canadian dollar

Mutual funds invest in different securities like stocks or fixed income securities, depending upon
the fund’s objectives. As a result, different schemes have different risks depending on the
underlying portfolio. The value of an investment may decline over a period of time because of
economic alterations or other events that affect the overall market.Also, the government may
come up with new regulations, which may affect a particular industry or class of industries. All
these factors influence the performance of Mutual Funds.

Risk and Reward: The diversification that mutual funds provide can help ease risk by offsetting
losses from some securities with gains in other securities. On the other hand, this could limit the
upside potential that is provided by holding a single security.

Lack of Control: Investors cannot determine the exact composition of a fund’s portfolio at any
given time, nor can they directly influence which securities the fund manager buys.

How investors’ trust on the funds can be built?

Firstly, immediate redemptions of the funds that have already missed their original deadlines will
help gain investors trust. I personally think all close-ended mutual funds should be redeemed on
the date of its maturity mentioned on the prospectus and trust documents.

Secondly, funds should make the information of their portfolio holdings public.

Lastly, BSEC (Bangladesh Securities and Exchange Commission) should be sending teams of
inspectors to have a look into the funds' portfolio, operation and investment decision process.

Mutual funds books should be inspected by BSEC inspectors in the same way bank books are
inspected by Bangladesh Bank inspectors. Banks take deposits from the public and invest it in
loan products whereas the asset management companies raise money from the public for
investing mainly in the capital market. As investing in capital market is riskier than investing in
loans, monitoring of the mutual fund industry is at least as important as monitoring banks.

Problems and prospect in Bangladesh

Generally people who participate in market they have a lack of knowledge of mutual fund. Many
don’t understand what mutual fund is. And those who understand mutual funds have a general
lack of trust for managers in the country. Also most of our active investors are inclined towards
short term, speculative trades. Mutual funds at deep discounts fail to attract them. Also lack of
disclosures by the mutual fund managers discourage investors from investing in mutual funds.
Other than Bangladesh in most countries mutual fund portfolios are made public. The lacks of
transparency, good corporate governance in the listed companies, accountability of the
accounting and audit profession and professionalism and integrity of fund managers are major
challenges of mutual fund.

The sector is still at a basic stage as it is very small compared to the capital market. Though there
are about 15 asset management companies licensed by BSEC (the securities regulator), only
seven have money under management. The asset management companies manage roughly Tk50
billion which is less than 3% of the total market capitalization. In many countries mutual fund
assets are close to 50% of market capitalization. The success and failure of MFs completely
depend on the portfolio managers. But, the portfolio managers proved to be unreliable and the
corrupt placement business destroyed the sector while the profits went into the companies'
pockets.

Performance of Mutual Fund Managers Bangladesh:

A simple question for the last - do we think mutual funds create value for its
investors?

Mutual funds definitely create value for investors and, therefore, they manage trillions of dollars
globally. Unfortunately, due to the challenges we mentioned, you can always argue that the
mutual fund industry in Bangladesh is not creating value for investors. But the solution is to
address the issues, not to shut down the industry.

The issue of Bangladesh Fund: Previously the government had decided to form an exclusive
mutual fund to conduct key trading in the market. In this regard, an open-ended mutual fund
titled 'Bangladesh Fund' was formed under the sponsorship of the Investment Corporation of
Bangladesh (ICB) and seven other state-owned banks. This fund formally started its operation
on May 05, 2011. Its target was to divest shares worth Tk 50 billion (5,000 crore).
But there arose a question as to how transparently and efficiently the mutual fund would be
managed, when the existing fund management was not that encouraging, particularly, when most
of the shares were overvalued. In the graph of the Dhaka Stock Exchange transactions moved in
a month in 2011 after announcement of the Bangladesh Fund package. So, the fund could not
help stabilize the market, rather it created an artificial demand in the market.

Finally, if you are a less risk-taker and long-term investor, you can consider investing in MFs.
Skilled managers are supposed to be involved in mutual fund management and they are supposed
to run the MFs based on extensive research work to minimize investors' risks by investing their
money in different shares.

To conclude, the main reason of the MF market lagging behind is that most of the funds are
close-ended. That means the MF shares mature in a specific period of time. Buying and selling of
open-ended MFs are different from those of close-ended MFs. The number of open-ended MFs
in the market is very small. There should be more open-ended MFs alongside the close-ended
ones. More MFs in the market can reduce the capital market's too much dependence on the
banking sector.

Conclusion
Mutual funds have emerged as the best in terms of variety, flexibility, diversification, liquidity as
well as tax benefits. Besides, through mutual funds investors can gain access to investment
opportunities that would otherwise be unavailable to them due to limited knowledge and
resources. Mutual funds have the capability to provide solutions to most investors’ needs,
however, the key is to do proper selection and have a process for monitoring and controlling. In
Bangladesh, the mutual fund industry is at a growing stage and it is incorporating a higher
number of new funds each year.

But sadly in respect of mutual fund management, Bangladesh stands nowhere close to the rest of
the world. It’s not all about the relative smallness of the industry in Bangladesh. It’s about the
regulatory environment, professionalism of the asset management companies and awareness of
the investors. Only a few years ago we saw an insane phenomenon in Bangladesh - mutual funds
trading at 200-300% premium to their NAVs.
Now things have somewhat reversed. Many closed-ended funds are trading now at 30-40%
discounts to NAVs. In Bangladesh the investors do not understand the funds or they do not trust
fund managers. So the investors’ lack of trust in the fund manager perhaps is the main reason
behind the current predicament of the industry.