The Financial Express

Demand for mutual funds continues to be at a low ebb

Nine-tenths trading below face value

| Updated: December 04, 2018 12:42:53

Picture used for illustrative purpose only — Collected Picture used for illustrative purpose only — Collected

The market prices of around 90 per cent units of closed-end mutual funds (MFs) are below their face value as investors' participation in trading is thin.

The prices of most of the funds have been below the face value for a long time, though many junk shares exhibited unusual spike.

The regulator's decision on extending the tenure of closed-end MFs and the lack of professionalism in fund management are cited by experts as among the reasons for the deplorable situation.

Of 37 closed-end MFs, the market prices of only four listed mutual funds (MFs) are above the face value.

In contrast, most of the MFs are trading below their face value of Tk 10 each.

The dividends recommended by the MFs are not up to the mark, either.

The Bangladesh Securities and Exchange Commission (BSEC) had approved some new provisions for the amendment to the rules of the MFs on December 7, 2015.

But the regulator has not finalised the proposed amendment to the rules of MFs yet, which were approved around three years ago to bring discipline in managing the MFs.

Former BSEC chairman Faruq Ahmad Siddiqi said most of the funds were floated before the 2010-11 stock market debacle as fund managers opted for taking the advantage of the bullish market.

"But their objective was wrong-footed as no analysis backs the decision on injecting funds into a bullish market," he said.

Mr. Siddiqi said investors' confidence in the MFs has kept sapping as fund managers lack professionalism.

Besides, he said, the scope for securing returns through professionalism is being squeezed because of frequent irrational behaviour the capital market shows.

Meanwhile, investors' participation in trading of the units is far from being expected, though prices of the units of many MFs are below their respective net asset values (NAVs).

Mr Siddiqi said the extension of tenure and size of the mutual funds are two major reasons behind the difference between face value and NAVs of the funds.

"Investors have scope for getting benefit through liquidation of closed-end MFs. How many years will an investor wait for reaping the benefit from the MFs?" Mr Siddiqi said.

A fund manager, who wished to remain anonymous, echoed the former BSEC chief, saying investors do not know when they will get back their investment as per NAV upon liquidation of a closed-end mutual fund.

Meanwhile, of 37 listed MFs, only seven have recommended dividend above 10 per cent for the year ending on June 30, 2018.

The amount of dividends recommended by 25 MFs is below 10 per cent.

Some of the MFs have recommended dividend in the form of both cash and Re-Investment Unit (RIU) and the percentage of RIU is greater than that of cash dividend.

In a bearish market, the unit holders are not happy with the RIU as they have to sell units at lower prices. But the management fee of a fund manager increases as the size of its MF is enlarged through the RIU.

The BSEC recently extended the tenure of existing closed-end MFs for another 10 years following an instruction from the government.

Insiders said the tenures of MFs have been extended so that the market does not face liquidity crisis in case of liquidation of the MFs.

The MFs, whose units are above face value, include Prime Finance First Mutual Fund, Grameen One: Scheme Two, Southeast Bank 1st Mutual Fund, and NLI First Mutual Fund.

The prices of the units of these MFs closed between Tk 10 and Tk 13 on Monday on the Dhaka Stock Exchange (DSE).

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