Mutual funds and our capital market

Mutual funds and our capital market

Published : Sunday, 05 May 2013  FEX

Md Rabiul Islam

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.
rabiul.islam@mblbd.com