Assignment

On

Status of Mutual Fund in Bangladesh

Submitted To:
Shah Md. Al Emran Sarker (AES)
Asst. Professor
Course –Financial Institutions & Market (FIN-601)

Prepared By:

Name ID
MD. Almas Hossen 20-1-14-0002

Programme: MBA
Date of Submission: 04-10-2020

ACKNOWLEDGEMENT
At first, I would like to thank Almighty Allah who provided us knowledge, energy
& skills to get opportunities & to increase our knowledge & experience by
completing this project.

Secondly, I especially thank our Financial Institutions (FIN- 601) course Instructor
Al Emran Sarker (AES), who guided us in every steps & aspects of this report so
that we can complete it successfully.

And I am thankful to my classmates and friends who always supported and helped
in finding the information. Finally, I would like to thank our entire group who gave
their time, and effort to make the project paper finish successfully.

Executive Summary
  

Mutual fund is an investment vehicle managed professionally that is made up of a

pool of funds collected from many investors for investing in securities such as
stocks, bonds, money market instruments and similar assets. In this report, mutual
fund sector of Bangladesh has been outlined. Issues like categories of mutual
funds, basic regulatory framework and policies, performance, impediments of the
sector are discussed. At the end, some suggestions are given for improving the
performance of this sector in Bangladesh.

Table of Contents
Serial No Particulars

1 Introduction

2 What is Mutual Fund?

3 Mutual Funds in Bangladesh

4 Regulatory Framework of Mutual Trust in Bangladesh

5 Situation of Mutual Funds Sector

6 Factors behind the Predicament of the Sector

7 Some Suggestions

8 Conclusion

9 References

Introduction:
A developed capital market consists of varieties of investment instruments and
mutual fund (MF)is one of them. But the share of mutual funds in Bangladesh's
capital market is very low. Here 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 MF sector all. But MF can be a good investment
alternative in this undiversified market. Generally retail investors are risk averse
investors. According to basic financial theory, diversification of investment
reduces risk. An individual may not have the time, expertise and resources to
undertake such diversification. Through mutual funds investors can gain access to
investment opportunities that would otherwise be unavailable to them due to
limited knowledge and resources. MFs pool the savings of a great number of
investors and make investments in a wide array of securities. Thus Shave emerged
as the best in terms of variety, flexibility, diversification, liquidity as well as tax
benefits.

1. Objective of the work:

 To get acquainted with the mutual fund sector of Bangladesh
 To bridge the gap between theoretical and practical knowledge
2. Methodology:
 Secondary data is used in this work. Information has been collected
from various websites, published reports and journals etc.
3. Limitation:
 Limited availability of information

What is mutual fund?

A mutual fund 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, also known as
portfolio managers, who invest such fund's capital and attempt to produce capital gains and
income for their investors. A mutual fund's portfolio is structured and maintained to match the
investment objectives stated in its prospectus. The portfolio managers apply their investment
management skills and necessary research works to ensure secured return of investors'
investment. Economic motivation for fund includes risk reduction via diversification, lower cost
of contracting and processing information, professional portfolio management, and liquidity,
variety and payment mechanism. Indicators to consider while taking an investment decision are:
 Total returns given by the fund on different schemes
 Returns on competing funds
 Objective of the fund and
 Promoter’s image
Mutual funds can be divided into following 3 types:

i. Closed-end Fund: This is limited number of shares issued by an investment company

through an underwriter where there are no sales or purchase of fund shares by the fund
company after initial issue. The price of the share is determined by the supply and
demand in the market.

ii. Open-end Fund: Unlike close-end fund, it can issue and redeem shares at any time. An
investor will generally purchase shares directly from the fund itself rather than from
existing shareholders. Open-end funds are portfolios of securities such as stocks, bonds
and money market instruments. Instruments in this fund own a pro rata share of the
overall portfolio. A professional investment manager oversees the portfolio, buying and
selling securities as appropriate.

iii. Unit Trust: In this fund a limited number of unit certificates are issued by the investment
company that are not tradable in the secondary market that is held by the trustee until
they are redeemed by the issuer. It has fixed termination date and investors know that the
portfolio consists of specific securities.

Types of Funds by Investment Objective:

i. Stock Fund/Equity Fund: Fund assets are typically in stock, with some amount of cash
which is quite small as opposed to bond, notes or other securities. Specific equity funds
may focus on a certain sector of the market or may be geared toward a certain level of
risk.

ii. Bond Fund: It invests in bonds and other debt securities. It typically pays higher
dividends than certificate of deposits and money market accounts.

iii. Money Market Fund: It is an open-end MF that invests in short-term debt securities such
as govt. treasury bills and commercial paper.

iv. Asset Allocation Fund: It provides investors with a portfolio of a fixed or variable mix of
the 3 main asset classes- stocks, bonds and cash equivalents- in a variety of securities. It
comes in several varieties. A ‘balanced fund’ implies a fixed mix of stocks and bonds.
‘Life-cycle’ or ‘target date’ funds that start out with a higher risk-return position and
gradually become less risky as the investor nears retirement. ‘Life-style’ or actively
managed asset allocation funds provide the active management of a fund’s asset classes
in response to market conditions.

v. Exchange Traded Fund (ETF): It is a marketable security that tracks an index, a

commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF
trades like a common stock on a stock exchange.VI.

vi. Islamic Unit Trust represents the contract for sharing of capital between the shareholders
to carry on business with a view to making profits that will subsequently be shared
among them. Here the unit holder is partners, the fund that is contributed by them is the
capital and the investment activity that is being undertaken by the fund is subject matter
for business. The dividends paid to each unit holder are the profit while the application to
buy the unit is the offer and authentication by the manager on the sale of the unit by the
fund is acceptance. (The Principles and Practice of Islamic Banking and Finance.

Mutual funds in Bangladesh

Bangladesh has a very small market for mutual funds. The sector is still at a nascent stage as it is
very small compared to the capital market. As of August, 2016, there are 35 closed-end MF
silted in the country's stock market. Mutual funds in Bangladesh can be divided into following
categories:
 Public Mutual Fund:
These are owned & managed by Investment Corporation of Bangladesh (ICB) which is
government-
Owned investment bank. It launched the country’s first mutual fund, the First ICB Mutual Fund
on 25 April, 1980.ICB is now managing twenty one funds: ten close-ends Mutual Fund and
eleven open-end Mutual Fund known as Unit Fund. Among the open-end funds, Bangladesh
Fund is the country’s largest open-end mutual fund. It has been formed under the sponsorship of
ICB and seven other state-owned banks and insurance companies. This fund formally started its
operation on May 05, 2011 with a target of divesting shares worth Tk 50billion (5,000 cores).
Only the Non-Resident Bangladeshis (NRB), local investors i.e. any government organizations
including state-owned banks & financial institutions, authority autonomous bodies, projects,
private commercial banks, insurance companies, non-banking financial institutions, merchant
banks, asset management companies and others are eligible to invest in this Fund.

 Private Mutual Fund:

These mutual funds are managed by private asset management companies. AIMS First
Guaranteed Mutual Fund, a closed-end balanced fund, launched in 2000 by Asset & Investment
Management Services (AIMS) of Bangladesh Limited is the first private mutual fund in
Bangladesh. The first-ever open-end mutual fund in Bangladesh, Prime Financial First Unit Fund
was launched in 2010 by the Prime Finance Asset Management Company. Currently, 25private
mutual funds are listed in the capital market.

 Islamic Mutual Fund:

ICB AMCL Islamic Unit Fund, launched in 2004 is the country’s first Islamic mutual fund. It has
been converted as an open-end Scheme from close-end nature during completing of its 10years
tenure. IFIL Islamic Mutual Fund 1 and AIBL 1st Islamic Mutual Fund are the other two Islamic
MFs which are close-end funds. Two new Islamic mutual funds are soon going to be launched
i. ATC Shariah Unit Fund sponsored by Asian Tiger Capital Partners Investment ltd. Its
subscription period has started from 17 August, 2016.Investment Corporation of
Bangladesh (ICB) will be acting as the fund’s trustee and custodian.
ii. UFS Padma Life Islamic Unit Fund which has recently got the draft prospectus approved
by Bangladesh Securities and Exchange Commission (BSEC). Universal Financial
 Solutions is the fund manager. The Investment Corporation of Bangladesh (ICB) will
play the role of trustee and custodian of the fund.

 Exchange Traded Fund (ETF):

On May, 2016 BSEC has approved the draft rules of ETF. According to BSEC, it will be listed
with the bourses under the Collective Investment Scheme, despite the fund being formed as an
open-ended one. The stockbrokers and dealers will play the role of market makers in case of the
ETF which will be formed through distribution of private placements to eligible investors. The
regulator will seek public opinion on the draft rules of the ETF soon.

Regulatory Framework of Mutual Trust in Bangladesh:

 1. Formation of mutual fund:
 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 the registration, it has to be approved by the Securities and
Exchange Commission. MFs must comply with Securities and Exchange Ordinance, 1969 and
the Securities and Exchange Commission (Mutual Fund) Laws, 2001.As per BSEC directives;
Net Asset Value (NAV) of the Fund shall be calculated and disclosed publicly at least once a
week. This keeps the investors updated on the performance of the fund and allows them to make
informed decisions. 
2. Key players in mutual fund operation
As per the Securities and Exchange Commission (SEC) Mutual Fund Laws, 2001 there are four
parties involved in floatation of a mutual fund, namely:
i. 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.
ii. Trustee: Any bank or financial institution or any other limited company registered by the
SEC to act as Trustee. There 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.
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.
iii. Asset Management Company: Any bank or financial institution or any other limited
company registered by the SEC to act as an Asset Management Company. Some of the
top asset managers in terms of asset under management are ICB AMCL, Race Asset
Management Company, LR Global Bangladesh Asset Management Company, and AIMS
of Bangladesh etc. 
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.
iv. 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. Following are four registered
custodians in capital market: 
1) Investment Corporation of Bangladesh (ICB)
2) Standard Chartered Bank (SCB)
3) BRAC Bank Ltd. And
 4) Citibank N.A
Key role: The Custodian keeps the securities of the Fund in safe custody.
3. Some Basic Policies Regarding Investment and Valuation:
 All investment will be made in the name of the Fund.
 Money to be collected under the Fund will be invested only in those cashable/transferable
instruments and securities approved by the BSEC and/or the Bangladesh Bank and/or the
Insurance Development & Regulatory Authority Bangladesh (IDRA) of Bangladesh or
any other competent authority in this regards.
 The Fund will not involve in option trading or short selling or carry forward transactions.
 The Fund shall not acquire any asset out of the Trust property, which involves the
assumption of any liability that is unlimited or shall result in encumbrance of the Trust
property in any way. 
 Not less than 60% of the total assets of the Fund shall be invested in capital market
instruments out of which at least 50% shall be invested in listed securities or as
determined by the Commission from time to time.
 Not more than 25% of the total assets of the fund will be invested in Fixed Income
Securities (FIS).
 The Fund will not invest more than 25% of its total assets in shares, debentures or other
securities in any one industry.
 The Fund will not invest more than 20% of the fund in shares, debentures or other
securities of a single company or group.
 The Fund will not invest more than 10% of its total assets in any one particular
company’s shares/debentures.
 The Fund will not invest more than 15% of any company’s paid-up capital at any point of
time. 
 The Fund will not buy its own unit. Neither will it invest in or lend to another scheme
under the same Asset Management Company. 
 In case of open-end MF, the Fund shall buy and sell securities on the basis of deliveries
and shall, in all cases of purchases, take delivery of securities and in all cases of sale,
deliver the securities on the respective settlement dates as per the custom and practice of
the stock exchanges and shall in no case put itself in a position whereby it has to make
short sale or carry forward transaction. 
 Total expenses (other than formation expenses) of the Scheme shall not exceed 4% of the
net asset value based on weekly averages.
 Asset Management Company and Trustee shall value the non-listed securities at least
once in every three months.
 Net Asset Value (NAV) of a mutual fund shows its ability to give dividends to unit
holders. NAV per Unit is determined on the last business day of each week by dividing
the value of the net asset of the Fund (the value of total assets less total liabilities) by the
total number of units outstanding.\
4.4 Some Special Policies of Islamic MF:
 Shariah Advisory Board shall be formed to ensure the compliance of Shariah Guidance.
 Shariah compliance audit report for each Accounting period must be issued together with
conventional audit report.
 The fund aims to provide interest free return to the investors by investing the fund only in
instruments which are confirmed as Sharia Compliant by the Fund's Sharia Advisor
fromtime to time.
 Investment in assets which are used to manufacture and/or sell haram goods (pork,
alcohol, tobacco) is prohibited. Likewise, investing in conventional banks, insurance and
leasing companies (for their association with interest), weapons, entertainment (hotels,
casinos/gambling, cinema, music etc.) are not allowed.
 The total debt and the sum of cash or interest bearing securities of the investee company
must be equal to or less than 33% of the trailing 12 months average market capitalization
of the company.
 The Accounts Receivable must be less than or equal to 45% of the Total Assets of the
company.
 All financial activities should be asset-based.

Situation of Mutual Funds Sector:

When the NAV of a fund rises beyond its face value, it is more able to give dividends. The
NAVs of mutual funds hit sky-high in 2010.Mutual funds were traded at even 500% premiums to
NAVs. The unusual rise in NAVs happened when the share market saw formation of a bubble
that ultimately burst and investors were affected.
In 2013, the mutual fund sector registered a gain of 8.73% against 5.19% by DSE Broad Index
(DSEX), the benchmark index of the Dhaka Stock Exchange, because of asset managers’ good
performance. According to the yearly analysis of Lanka Bangla Securities, that year all asset
managers in the industry had outperformed the market gauge in terms of return on investment.
More gain could have been generated if the market remained stable.
Currently, most closed-end funds are trading at 30-40% discounts to NAV. The industry’s
current price to net asset value (NAV) ratio stands at 0.76, which means the close-end mutual
funds are trading on discount.

The asset management companies manage money less than 3% of the total market capitalization.

Source: DSE Sector-Based Performance May 2016

The Figure above discloses that rank order of MF sector out of 20 sectors was 12th based on the
market capitalization in May 2016 at DSE. Based on the latest NAV, total market capitalization
of MFs accounts for only more than 1% of the total DSE market capitalization, which is more
than 50% in many markets.
Year-to-date (YTD) return is a metric that measures the amount of profit generated from
investment since the beginning of the current fiscal year up to the date the financial data is
reported. It is expressed as a percentage. The following graphs show the stock market year-to-
date return of some mutual fund stocks in Dhaka Stock Exchange in 2016.
A positive YTD value means that the investment yielded a positive return

Source: Lanka Bangla Securities, 17 August 2016

A negative YTD value means that the investment resulted in a loss in capital.

Source: Lanka Bangla Securities,17 August 2016

Factors behind the Predicament of the Sector:

Mutual fund sector in Bangladesh is witnessing under-subscriptions of the IPOs (initial public
offerings) of closed-end funds. Though some asset management companies have come up with
open-ended mutual funds, it has not been a huge success either. Despite bright prospects of
mobilizing savings and providing investment opportunities to small savers and the ability to meet
different risk profiles through providing a wide range of products, mutual funds have not
emerged as a preferred saving mode. Reasons behind this are:
 There is a lack of availability of quality shares. The state of the capital is also
underdeveloped. 
 The capital market of Bangladesh is highly volatile. Stock market trends show that prices
of almost all the listed securities move in unpredictable direction.
 Most of the active investors in Bangladesh are inclined towards short term, speculative
trades. Mutual funds at deep discounts fail to attract them.
 Investors’ lack of trust in the fund manager is another major factor. Lack of
clarificationby the mutual fund managers discourage investors from investing in mutual
funds.
 As organized secondary debenture market is absent in Bangladesh, fund managers
facedifficulty to swap between asset classes if and when required.
 Limited money market instrument has narrowed the opportunity of short term
ortemporary investments of the fund.

Some Suggestions:
 Immediate redemptions of the funds that have already missed their original deadlines
willhelp gain investors trust.
 Funds should make the information of their portfolio holdings public.
 The integrity of the fund managers is extremely important. If a fund reports abnormal
andabsurd net asset values, explanation has to be made.
 Transparency in the capital market has to be ensured. When the listed companies
performreasonably, the funds are able to create value for the investors because the funds
investmostly in listed companies.
 Mutual funds portfolio, operation and investment decision process should be inspected
byBSEC inspectors in the same way bank books are inspected by Bangladesh
Bankinspectors. Banks take deposits from the public and invest it in loan products
whereas theasset management companies raise money from the public for investing
mainly in thecapital 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.

Conclusion:
By purchasing a single unit of mutual fund, investors get access to diversified
portfolio minuspaying a great deal in transaction or operating cost through
professional asset managementservice.It saves them from various regulations
applicable to individual investment parameters.Not only thedividend income from
the fund is tax free up-to certain level, investment in theFund also qualifies for
investment tax credit. In addition, they by default enjoy the benefit ofacquiring
stocks at the Primary Market.
Although still small in size, mutual funds have contributed toward broadening the
base of thecountry’s capital market. Growth oriented mutual funds are expected to
offer the advantages ofdiversification, market timing and selectivity.However, in
the long-run, mutual funds’performance will be closely related to the performance
of the economy in general and the capitalmarket in particular. Lack of good
corporate governance in the listed companies, accountabilityof the accounting and
audit profession and professionalism and integrity of fund managers aremajor
challenges before mutual funds to excel. If these issues are addressed, the mutual
fundindustry in Bangladesh can create value for investors and reduce the capital
market's too muchdependence on the banking sector.

References:
Das RL, Performance of Mutual Funds in Bangladesh: The Case of Bangladesh in World Journal
of Social Sciences, Vol.6 No.1 March 2016 issue. pp 210-221. [pdf] .Available at:
http://www.wjsspapers.com/static/documents/March/2016/17.%20Rajib. [Accessed: 17
August, 2016]
DSE Sector-Based Performance May 2016 [pdf].Available at:
http://www.dse.com.bd/pdf/Mreview_May_2016.[Accessed 18th August]
Hossain HMM, Runi HP, 2013, Financial Markets and Institutions: Conventional and
Islamic Approach, BIIT, Dhaka.
Islam R, 2015, Mutual Fund Performance: An analysis of Mutual Funds’ return compare to the
Market Return.[pdf] Available at:
http://dspace.bracu.ac.bd/jspui/bitstream/10361/3957/1/12364053.[Accessed: 17 August, 2016]
Mutual Fund Performance: Share Market Analysis of Dhaka Stock Exchange. [Online]Available
at:
http://lankabd.com/mutualfunds/fundcomparison?
d1332565o=1&siteLanguage=en&siteLanguage=en&d-1332565-s=1 [Accessed: 17 August,
2016]
Yatim MN, Nasir MH,2006, The Principles and Practice of Islamic Banking and Finance, 4th
edition, Petaling Jaya: Prentice Hall
http://www.investopedia.com/university/mutualfunds/mutualfunds.asp
http://print.thefinancialexpressbd.com/old/index.php?
http://archive.thedailystar.net/news2014/mutual-funds-perform-better-than-dse-average-7567 
http://www.thefinancialexpress-bd.com/2016/05/26/31878/BSEC-approves-ETF-draft-rules 
http://archive.dhakatribune.com/stock-market/2014/feb/04/long-way-go-mutual-
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http://www.icbamcl.com.bd/