Investors, especially individuals and newcomers to the market might expect mutual funds (MF) a safe bet, considering how they are pooled from many people and are managed by professionals.
Unfortunately though, these instruments have been among the poorest performers in the capital market over the last few years, breaking investor confidence and even bankrupting some.
Mutual funds are currently struggling to keep confidence in equities alive, brokers and investors say.
As of Thursday, 27 of the 36 mutual funds in the market were trading below their face value, and all of them traded below their Net Asset Value (NAV).
There are five MFs whose NAVs are below their face values of Tk10 per unit.
From 2010 to 2011, Mohammad Mynul Hasan invested in several mutual funds at over Tk20 per unit, which is currently being traded below the face value of Tk10 per unit.
“I do not want to recall my bitter experience about my investment in mutual funds. It was a curse that left me penniless. Even now, I am suffering because of the poor performance of mutual funds at the country's stock markets,” Mynul told the Dhaka Tribune.
Hundreds of small investors like Mynul have lost their confidence in MF, due to low performance in offering dividends for unit holders. MF previously had the reputation of being one of the safest means of investment for individuals.
As of December 31, 2017, among the 36 closed-end funds (CEF), only one was traded at a premium value, while all others were traded at a discount.
The industry’s current price to NAV ratio stands at 0.65, which means the CEF is being traded at 35% discount to its NAV.
The trend of new funds coming into the market has also seen a drastic fall in recent years, as banks and other sponsors are reluctant to invest in MF.
Mutual fund also plays an important role in keeping the market stable. But the role and the performance of the fund managers have recently come under question.
According to Dhaka Stock Exchange’s (DSE) latest data, two mutual funds offloaded units of Tk70 crore in 2017, which held a value of around Tk190 crore in 2016.
Stock analysts are blaming the lack of professionalism and integrity in managing funds for the sorry state of this financial sector.
Fund mangers admit that both institutional and individual investors do not want to invest in MF at the moment, as they did not get expected returns.
What is making the investors reluctant?
Among 36 MFs, only a few are meeting the expectation of investors in offering dividends.
“An investor judges a MF for investment based on what it is offering to the investor and would offer in the future. Since they had a bitter experience in terms of returns for their investment, they lost confidence in it,” Professor Abu Ahmed, a stock analyst told the Dhaka Tribune.
He pointed out that most of the issue managers are not efficient in managing the funds to facilitate a better return, and there is also an absence of integrity.
“I believe that the stock market regulator should liquidate non-performing funds and return the investors' money,” Prof Ahmed added.
Ahmed Rashid Lali, former president of DSE Brokers Association said: “To gain investors’ trust and attract investment, a fund manager must follow the rules and regulations, and must ensure ethical practices and professionalism. However, this is now absent from this sector.
“As a result, small investors are reluctant to pour money into MFs.”
Ahmed further said: “An investigation carried out by the Bangladesh Securities and Exchange Commission (BSEC) revealed that a number of fund managers invested the money outside of the stock market, which lowered investors’ confidence.”
An asset manager, preferring to remain anonymous, said: “Most of the funds were invested in stock at a higher price during 2010-11, when the market was in bullish trend. As a result, it has been difficult for the investors to make good profit out of their investment.”
Challenges for new MFs
The mutual fund sector is facing a number of big challenges in 2018, prominent among them being bringing in new funds and finding sponsors from institutional investors.
Lower returns from the investments and central bank’s regulatory bar on stock market exposure is further complicating the matter.
“Banks are reluctant to make fresh investment as they did not get the expected returns in terms of profits from the MF investment,” seeking anonymity, a fund manager told this reporter.
“There is need for regulatory reforms in bank exposure to stock market, as well as issue management guidelines,” the manager added.
Usually, life insurance companies make big investments in MF but this is not happening either, as they have now turned to managing funds by themselves, the manager added.
Investment in MF is considered as bank's investment exposure to stock market and the permissible rate is 25% of total liabilities of a bank.
“In bringing new funds, finding an interested sponsor is very tough as they are reluctant because of the exposure limit. Bangladesh Bank should keep the investment of banks in open end mutual funds, and out of exposure in the capital market,” Moin Al Kashem, managing director of Prime Finance Asset Management Company told the Dhaka Tribune.
“To make mutual funds more lucrative, a fund manager will have to ensure participation of small investors, and they should give up expectation of high profits. I think 10% to 15% return is enough,” he opined.
Role of stakeholders and ways to move forward
After the stock market crash in 2010, a good number of small investors went out of market as they were not able to recover from the losses suffered. But there is hope in the days to come as the market is gradually building up momentum with the flow of new investors.
“A fund manager has to restore investor confidence by ensuring transparency in managing a fund professionally and offering a good return,” said Professor Abu Ahmed.
He added: “The stock market regulator should ensure the investors' rights by implementing regulatory reforms if needed. Strong monitoring and looking into the fund investment is a must, since anomalies were seen before.”
“Mutual funds should be the first choice of stock investors, especially for new investors as they do not have enough knowledge for making investments,” recommended KAM Majedur Rahman, managing director of DSE.
“In the last year, we did not see those in the sector doing what is necessary. DSE is going to take initiative to work jointly to make the mutual fund a vibrant one,” he said.
The MD of DSE concluded by saying: “In making investors aware about the mutual funds, we are going to introduce a bulletin board through which a fund manager will be able disseminate information including valuation and market demands to the investors.”