Performance and an overall state of mutual funds in BangladeshAs we know, Bangladesh is a very small market for mutual funds.

Currently 19 mutual funds

trade at an average of 2.75 times their net asset value (NAV) and 75 times their earnings. We
have come to know that a sample of 21 mutual funds in the Asia pacific region is traded at 0.91
times or below their NAV on average. Till now, together 19 mutual funds account for less than
3% of our total market capitalization with combined assets of less than tk. 2000 crores. However
this market is not happy at all at this moment.
The SEC implemented revised mutual fund regulations on previous years 22 July that prohibited
the mutual funds from issuing new shares to increase their capital bases. After this amendment
faced writ petition from investors, the high court on November 9, allowed mutual funds to raise
their size by issuing bonus and rights, without curbing the securities regulators absolute power
to determine which funds would be eligible to expand capital base although the verdict was
suspended hours after announcement giving the SEC adequate time to appeal. On the next day,
the benchmark DSE general index (DGEN) gained 17.41 points or 0.51% to close at 3428.89,
which was a new high. The broader DSE All Shares Price Index (DSI) moved up 14.38 points or
0.50 % to close at 2871.75 while DSE-20 blue chip index rose 10.04 points or 0.44% to close at
2313.01. Although the market move was led by the mutual fund on that day, following days were
closed in the market, and the issue in the high court is still pending creating uncertainty among
thousands of general investors.

SWOT AnalysisFirst we need to know the core strengths, weaknesses, opportunities and threats of mutual funds.
Strengths

Low risk- If one wishes to invest on long terms and availing low risk, mutual funds are
ideal for them.

Portfolio diversification- Mutual funds follow one principle, dont put too many eggs
in one basket. Mutual funds diversifies portfolio by investing in various securities. Thus
this reduces the risk.

Non-volatile- As mutual funds pursue portfolio diversification, its not as volatile as

other secondary market shares.

Maximizing the security and expecting investment opportunities- The fund managers
having strong research, explores new investment options make available opportunities for
ones investment to flourish. Other than that, investments will be secured with a less risk
and moderate returns.

Liquidity- Mutual funds can be bought and sold on any business day generally without a
loss in the value.

Affordable- A mutual fund due to its large corpus allows even a small investor to have
the benefit of its investment strategy. The minimum investment on mutual funds starts
from 1,000 BDT.

Tax advantage- The prime tax benefits enjoyed now is long term capital gains. If mutual
funds are invested for long term, double taxation can be avoided.

Transparency- The investor gets regular info on the value of that persons investment in
addition to disclosure on the specific investments made by the fund, the proportion
invested in each class of assets and the fund managers investment strategy and outlook.

Earning- Investing in mutual funds is risk free, lucrative return and no market can offer
this kind of return of dividend. Investing in few mutual funds without any risk, may earn
one over 50% in some stocks or mutual funds per year.

Weaknesses

Untailored- One disadvantage is, mutual funds are not tailored to the specific investment
needs or tax status of individual shareholders.

Costs- Mutual funds have a lot of costs. Costs can be broken into ongoing fees (expense
ratio presents this) and transaction fees (loads). These loads include upfront load (money
charged for buying shares) and back-end load (redemption fee).

Market capitalization- Mutual funds market capitalization in our country is only 4%

while its almost 50% in the developed countries such as US and Europe.

Sub-optimal purchases- Mutual fund managers cannot hoard cash. When investors buy
mutual fund shares, the fund manager just turn around and buy shares of stocks that fit
within certain guideline specified by the prospectus.

Fully invested- By law funds are required to be fully invested, which suggests mutual
fund has only 2-3% in cash at any one time. This implies that, mutual funds are severely
limited in protecting their shareholders during a time of a crash or a bull market.

Ignoring potentiality- What happens here is, the fund has so much cash which should
be owned by purchasing hundreds of stocks within its classification. Thus its impossible
to focus on high potential stocks and thus the mutual funds become closet index fund.

Forced redemption- Fund manager is forced to sell stocks when investors sell shares of
mutual fund and the fund doesnt have enough cash reserve to meet the demand.

Tax effect- For an example- if someones timing is bad that means, that person just buys
before the fund makes its capital gains distribution or that person buys during the year
that the fund manager is taking a lot of profit, that person could end up paying a very big
tax bill for no good reason.

Increasing capital- In Bangladesh all the mutual funds are closed end in nature. So like
open end funds essential can increase their capital base issuing new shares whenever they
want. But closed ended funds cannot. Thus they cant increase capital.

Unwillingness- Since investors are not really impressed with the marginal performance
investing in the mutual funds; they feel reluctant to put money on mutual funds in the
secondary market.

Opportunities

Possibility of growth- RACE management, an asset management company conducts a

study which tells us that there will be a tk. 10,000 crore growth for 2015, in terms of
assets while in 2008 it was only tk. 1000 crore

New issuers- Investors have gained around 350% of returns on the last six mutual funds
participating in their IPO although the investors had sold them within the next three
months after the first days trade. This situation has motivated many investors but due to
limited supply they could not participate. So to fill this gap many new issuers of mutual
funds have completed the formalities necessary to do business.

Rights and bonuses- As closed funds cant issue new shares like open ended funds; they
should announce rights and bonuses for expansion of their capital.

More diversity- The mutual funds should be more diversified so that all the segments of
the markets should be benefitted. For example- if ETF (Exchange Traded Funds) were
introduced in our country some investors could invest at specific stock index. Hedge
funds could be initiated where investors want to invest in larger investment rather than
minimum investment.

Online- According to an Indian daily, mutual funds could bring down their admin costs
0.75% if the trading is done online since bond funds can charge 2.5% as admin fees.

Recovering clumsy situation- Before 2008 there were problems regarding the prospects
and future of this field but after 2008, 4 asset management companies made their entry
and things are expected to change.

Supporting growth- If we follow Indias mutual fund sector, we can get prosperity in
this sector. One of the major factors of advancement of this industry is due to the

booming stock market with an optimistic domestic economy of their country. Another
reason is favorable regulatory regime which has been enforced by SEBI.
Threats

DSE capitalization- A potential threat could be drawn with the fact that market
capitalization of DSE increased by almost 10 times in the last decade rising on the
growing demand by investors. But the number of mutual funds didnt grow to that extent.

Tax inefficiency- Investors dont have a choice when it comes to capital gain payouts in
mutual funds. Due to the turnover, redemptions, gains and losses in security holdings
throughout the year, investors typically receive distributions from the fund that are an
uncontrollable tax event.

High expense ratios- Investors should be cautious when investing in funds with expense
ratios higher than 1.20%, as they will be considered on the higher cost end.

Management turnover- Many investors select mutual funds based on their past
performance. Unfortunately, with the high rate of management turnover within the asset
management industry, the managers who were primarily responsible for a particular
funds superior performance in the past may no longer be working for the company.

Lack of trustee- According to DSE president, insufficient number of trustee and

custodians are other major challenges.

Close end limitations- The sell and buy mechanism is also different compared to open
end ones which is not practiced which could contract the future scope of the field.

Recommendation

SECs approval- As its practiced globally; SEC should not be wasting time in legal
complications and should be issuing bonuses and rights to make the investors attracted to
the market.

Introducing open ended funds- Mutual funds in Bangladesh should introduce open end
funds (if demand is high, the fund will continue to issue shares no matter how many
investors are there). What happens here, fund shares are transacted so that these funds
provide investors with a very useful and convenient investing vehicle.

Costs should be minimized- The ongoing fees and loads should be minimized as much
as possible so that the investors might be attracted.

Fulfilling the lacks- The above said situation of lack of trustee and professionals
turnover should be improved so that the investors might be benefitted.

Hoarding cash- The fund managers should have this provision so that the fund could be
invested at more attracting portfolios in future.

Regarding Potentiality- Not investing on hundreds of shares, there should be a

provision of investing at the most potential ones.

As we know mutual funds are traded in secondary markets (through stock exchange). So price of
this professionally managed collective investment scheme that pools money from many investors
is determined on the basis of demand and supply. As we know the Dhaka Stock Exchange (DSE)
price index depends on the movement of the funds. So when the price of the fund increases or
decreases, DSE price index reciprocates. This reflects the strong impact of mutual funds on the
security market. Thus we need to do some brief yet precise analysis on different prospects of the
present scenario of mutual funds in Bangladesh.