Download Mutual funds and our capital market

Mutual funds and our capital market
By-Md Rabiul Islam
The Financial Express, 05 May 2013
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 organisation, AIMS, evolved its
professional mechanism in 1999 for organising 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.
Definition of mutual funds: A mutual fund is a professionally managed type of collective
investment scheme that pools money from many investors and is invested typically in
investment securities (stocks, bonds, short-term money market instruments, other
mutual funds, other securities, and/or commodities such as precious metals). The
mutual fund will have a fund manager that trades (buys and sells) the fund's
investments in accordance with the fund's investment objectives. A fund registered with
the Bangladesh Securities and Exchange Commission (BSEC) must distribute nearly all
of its net income and net realised gains from the sale of securities (if any) to its
investors at least annually.
Mutual funds may be of different types from their investment objectives, underlying
portfolios of shares, risks and returns, fees, charges including all fund liabilities. There
are basically two types of mutual funds open-ended and close-ended.
Open-end mutual funds: When demand rises, the fund will continue to issue shares and
there will be no restriction on the issue of the fund and the fund will be closed to new
investors when assets would be very large.
Open-end means at the end of every day, the fund continually issues new shares to
investors buying into the fund and must stand ready to buy back shares from them
redeeming their shares at the then current net asset value per share. The public offering
price, or POP, is the NAV plus a sales charge applicable for open end mutual funds.
Open-end mutual funds sell shares at the POP and redeem shares at the NAV, and so
process orders only after the NAV is determined.
Following are the examples: i) ICB Unit Certificate ii) ICB AMCL Unit Certificate, iii) ICB
AMCL Pension Holder Unit Certificate and iv) Prime Finance Unit Fund
Close-end mutual funds: It emerges under an initial public offering or 'IPO'; it is publicly
traded and it issues fixed amount of share and listed and traded at a stock exchange.
Subsequently, the fund's shares trade with buyers and sellers of shares in the
secondary market at a market-determined price (which is likely not equal to net asset
value). Closed-end funds (the shares of which are traded by investors) may trade at a
higher or lower price than their NAV; this is known as a premium or discount,
respectively.
Following are the examples: 1st ICB Mutual Fund, 2nd ICB Mutual Fund, 3rd ICB
Mutual Fund, 4th ICB Mutual Fund, 5th ICB Mutual Fund, 6th ICB Mutual Fund, 7th ICB
Mutual Fund, 8th ICB Mutual Fund, 1st BSRS Mutual Fund, ICB AMCL 1st Mutual
Fund, ICB AMCL Islamic Mutual Fund, ICB AMCL 1st NRB Mutual Fund, ICB AMCL
2nd NRB Mutual Fund, AIMS 1st guaranteed Mutual Fund, DBH 1st Mutual Fund,
Janata Bank 1st Mutual Fund, MBL 1st Mutual Fund, EBL 1st Mutual Fund, Trust Bank
1st Mutual Fund, PHP 1st Mutual Fund, Green Delta 1st Mutual fund etc.
The following parties are required to launch a mutuasl fund:
Sponsor : There has to be a promoter of the company. Sponsor is a bank, finance or
insurance company or statutory organisation which singly or jointly can form a mutual
fund with another bank, finance or insurance company, statutory organisation
recognised registered trust fund, pension fund, provident fund or super annuation fund.
There may be single or multiple sponsors for a fund.
Trustees : They hold the property of the mutual fund for the benefit 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.
Custodian : It bears the securities of various schemes of the fund in its places. 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
Asset manager or asset management company or manager to the issue or issue
manager: They are authorised to act as issue and portfolio manager of the mutual
funds.
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.
Sponsor will appoint trustee, custodian and asset manager.
Figure 1. Conceptual Framework of Mutual Funds
The above diagram clearly indicates when we will classify the financial institutions we
will find that mutual funds are the best expample of contractual financial institution under
the head of financial intermediary of the financial institutions. Hence it can concluded
that mutual funds truly come from financial institutions of contractual category. Therfore
it can also be said that mutual fund is an institution.
The Table 1 represents the number of mutual funds occupied by their asset managers
in
our capital market. Table 1 shows that total 41 numbers of mutual funds are there in our
capital market. ICB AMCL was issued the highest 11 numbers of mutual funds followed
by other issue managers.
According to prevailing participation of asset managers in our capital market, we see
from the Figure 2 that RACE Asset Management Company possessed about 45 per
cent highest market share of mutual funds compared to other issue managers based on
their asset under management. The finding also shows 12.25 per cent market share of
manager to the issue goes to ICB AMCL compared to ICB alone 5.5 per cent. If we
consider both ICB and ICB AMCL then about 18 per cent market share will be in their
hands compared to other asset managers, which indicates third position in our capital
market for managing mutual funds based on asset portfolio. So, ICB should exercise its
expertise role in organising the mutual fund for the greater improvement of our capital
market.
The Table 2 represents 20 sectors of capital market and their rank order position based
on the market capitalization at DSE. Table 2 discloses that out of 20 sectors at DSE,
position of mutual funds (MFs) was the 13th according to rank order. It also recognises
that out of total market capitalisation of DSE, mutual funds cascade only 1.92 per cent
of its total market capitalisation, which is very low.
It implies that promoters of mutual fund are very much reluctant for access to the
capital market. This may be due to the deficit of right kind of sponsors and decision
makers in our country at the right time for accelerating the mutual funds. So, it is time to
float the MFs in our capital market in the days ahead.
The Figure 3 shows the price earning ratios of mutual fund over various periods of time
in 2008 and 2009 were very high at 20.37 and 29.06 respectively compared to other
years. In 2011, P/E was very low i.e it was found at 6.24 compared to other years. The
significant change of P/E was not found. This indicates the mutual funds were also
affected by market volatility.
Figure 3. Price Earning Ratio of Mutual Funds
Data of last two years till now show that the P/E is being decreased compared to other
years showing the significant positive signal for investment in mutual funds. So, it can
also be concluded that higher the P/E is, the higher is the risk for investment and lower
P/E will minimise the risks.
Mutual funds are a professionally managed type of collective investment. It is managed
by portfolio manager or investment banker
and institutions popularly known as portfolio management. Sponsors are playing the
vital role for arranging and appointing the manager to the issues in launching MFs. Data
reveals that only 41 numbers of mutual funds are operating in our capital market
followed by 44.93 per cent of the highest market share of RACE Asset Management
Company based on its asset under management of mutual funds and only 1.92 per cent
market capitalisation of all mutual funds out of entire market capitalisation of our capital
market. The present study also shows that P/E ratio of mutual funds is in decreasing
trend. It can therefore be recommended to float more and more mutual funds in our
capital market to raise the market capitalisation for creation of sound and sustainable
market and to ensure the rules of mutual funds as well as to achieve maximum return in
minimising all kinds of risks by effectively maintaining well-diversified portfolios.
The writer is an MBA Graduate, IBA, RU and Officer, Mercantile Bank Ltd.
Chapainawabganj Branch.
[email protected]