Introduction:

A Mutual Fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals). Mutual fund is a special type of company that pools together money from many investors and invests it on behalf of the group, in accordance with a stated set of objectives. Mutual funds raise the money by selling shares of the fund to the public much like any other company can sell stock in itself to the public. Funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by fund. The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund registered with the Securities and Exchange Commission (SEC) under both SEC and internal revenue service rules must distribute nearly all of its net income and net realized gains from the sale of securities to its investors at least annually. Most funds are overseen by a board of directors or trustees which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors. Bangladesh has a very small market for mutual funds. As reported earlier in a contemporary, currently 17 mutual funds trade at an average of 2.75 times their net asset value (NAV) and 75 times their earnings. Till now, 19 mutual funds together account for less than 3% of our total market capitalization with combined assets of less than Tk 20 billion. However, this small market is not happy at all at this moment.

Investment objectives:

Mutual funds may invest in many kinds of securities (subject to its investment objective as set forth in the fund's prospectus, which is the legal document under SEC laws which offers the funds for sale and contains a wealth of information about the fund). The most common securities purchased are "cash" or money market instruments, stocks, bonds, other mutual fund shares and more exotic instruments such as derivatives like forwards, futures, options and swaps. Some funds' investment objectives (and or its name) define the type of investments in which the fund invests. Most mutual funds' investment portfolios are continually monitored by one or more employees within the sponsoring investment adviser or management company, typically called a portfolio manager and their assistants, who invest the funds assets in accordance with its investment objective and trade securities in relation to any net inflows or outflows of investor capital (if applicable), as well as the ongoing performance of investments appropriate for the fund. A mutual fund is advised by the investment adviser under an advisory contract which generally is subject to renewal annually. Mutual funds are subject to a special set of regulatory, accounting, and tax rules. Mutual fund distributions of tax-free municipal bond income are tax-free to the shareholder. Taxable distributions can be either ordinary income or capital gains, depending on how the fund earned those distributions. Net losses are not distributed or passed through to fund investors.

Mutual Fund Classification:

1) Open End Fund 2) Closed End Fund

Open End Fund: An open end fund raise fund for a certain period and it stands ready at all times to sell new shares or buy back old shares. Close End Fund: An close end fund raise fund for a uncertain period and it has a fixed number of shares, and purchasers and sellers of shares must trade with each other.
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Types of mutual fund:

Income fund: is the composition of investment in shares and securities of Blue Chip Company. In shares and securities of trading company. In shares and securities of company staying at the saturation steps of industry life cycle. Growth Fund: In share and securities of new company with highest potentiality. Balanced Fund: Equity securities and debt securities proportionately. Index Fund: In share and securities of different companies that can constitute a market index. Equity Fund: Only equity securities Bond Fund : Only bond securities.

Mutual Fund in Bangladesh:

Every commercial bank, non-banking financial institution and insurance company in Bangladesh queued up for entering the mutual fund industry which once was an exclusive domain of the state owned investment company, the Investment Corporation of Bangladesh (ICB) which accumulated with 1st ICB to 8th ICB mutual fund. The ICB floated eight small size (between Tk 5.0 million and Tk 50 million) close-end and one open-end mutual (unit funds between 1980 and 1996).The funds proved to be huge success and the market capitalization of eight close-end mutual funds having the total size of tk 177.5 million stood at tk 2.47 billion as of June 30 last. The unit holders of these funds have been receiving handsome dividends for year after year. The Asset Management Company Ltd (AMCL), a subsidiary of the ICB, created some years back, has been floating both close-end and open-end mutual funds regularly. The size of the AMCL managed close-end funds is also quite large, up to Tk 1.0 billion each. The Asset and Investment Management Service (AIMS), an asset management company, floated the first private sector mutual fund in 2000. It is also managing two sector funds, Grameen-1 and Grameen-2. First Janata Bank mutual fund, IFIC Bank First mutual fund, PHP First mutual fund, Popular life First mutual fund, Green delta First mutual fund are the latest mutual fund traded by both stock exchange in Bangladesh .

Advantages of Mutual Fund:

Diversification: Mutual Fund can reduce overall investment risk by spreading risk across many different assets. With a mutual fund investors can diversify their holdings both across companies and across asset classes. So diversification results in less risk than purchased just one or two investments. Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. energy funds), while others might target growth opportunities in general. There are plenty of funds, and each has its own objectives and focus. Liquidity: In the case of mutual funds, it's as easy to sell a share of a mutual fund as it is to sell a share of stock although some funds charge a fee for redemptions and others you can only redeem at the end of the trading day Low Investment Minimums: Most mutual funds will allow you to buy into the fund with as little tk 1,000 or tk 5,000, and some funds even allow a "no minimum" initial investment. Convenience: When own a mutual fund, don't need to worry about tracking the dozens of different securities in which the fund invests; rather, all you need to do is to keep track of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and to buy and sell shares in them. Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time. Of course, this benefit is reduced somewhat by the fact that they are buying and selling a large number of different stocks.

Drawbacks:
There are certainly some benefits to mutual fund investing, but should also be aware of the drawbacks associated with mutual funds.
No Insurance: Mutual funds, although regulated by the government, are not insured

against losses. The General Insurance Corporation only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds.

Dilution: Although diversification reduces the amount of risk involved in investing in

mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings.

Fees and Expenses: Most mutual funds charge management and operating fees that

pay for the fund's management expenses. In addition, some mutual funds charge high sales commissions, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell.

Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on

average, around 75% of all mutual funds fail to beat the major market indexes.

Loss of Control: The managers of mutual funds make all of the decisions about which

securities to buy and sell and when to do so. This can make it difficult for investors when trying to manage portfolio.

Trading Limitations: Although mutual funds are highly liquid in general, most

mutual funds (called open-ended funds) cannot be bought or sold in the middle of the
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trading day. Can only buy and sell them at the end of the day, after they've calculated the current value of their holdings.

Size: Some mutual funds are too big to find enough good investments. This is

especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own.

Factors That Influencing Poor Performance of Mutual Fund in Bangladesh:

SEC Regulation:

A very serious but interesting debate has been looming for the last couple of weeks regarding mutual funds in Bangladesh. The SEC implemented revised mutual fund regulations on July 22 that prohibited the mutual funds from issuing new shares either in the form of right or bonus shares to increase their capital bases. After this amendment faced writ petition from investors, The High Court on November 09, 2009 allowed mutual funds to raise their size by issuing bonus and rights, without curbing the securities regulator's absolute power to determine which funds would be eligible to expand the capital base although this verdict was suspended hours after the announcement giving the SEC adequate time to appeal. On the following day, the benchmark Dhaka Stock Exchange (DSE) General Index (DGEN) gained 17.41 points or 0.51 per cent 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 per cent to close at 2871.75 while DSE-20 blue chips index rose 10.24 points or 0.44 per cent to close at 2313.01. Although the market move was led by the mutual fund on that day, following days were worse in the market, and the issue in the high court is still pending creating uncertainty among thousands of innocent general investors.
Investors Return:

Although at the pre-IPO or IPO phase, investors are profiting well, the secondary market for mutual funds has remained much less profitable. Since investors are not really impressed by the marginal performance of the mutual funds; they feel reluctant to put money in them in the secondary market. Many of the investors have complained of waiting too long for a point difference benefit or facing forced sale to avoid further loss and recover he opportunity loss. Therefore, the consequence is clear. A dull secondary market for mutual funds has been
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restricting investors from taking advantage properly, and thus making more and more investors negative towards them.
Distrust on Mutual Fund:

On the basis of last few days it is clear that some of the mutual funds are traded in the market under face value. As a result investors are not willing to enter these scripts. Also applications of IPO of mutual fund are unresponsive to the general investors. People lost their trust on mutual fund and because of this all new issued mutual fund are losing their value day by day.

Recommendation to develop undervalued Mutual Fund:

The recommendations came following the recent trend of the mutual funds, as the investors are reluctant to buy those units. Besides, some of the funds experienced poor subscription compared to other issues, which went public earlier. Fund managers have submitted six-point proposals to the securities regulator to sustain and develop the mutual fund sectors. Facilitating the mutual funds with right share offering. Reducing the lock period imposed on the private placement of the mutual funds. Extending the mutual fund tenure. Opening the limitation of private placement. Increasing the quota of the mutual funds in IPOs. Allowing the mutual funds to participate in the book building bidding process.

Conclusion:
At this stage, a globally accepted and traditionally practiced issue like issuance of bonus and rights by mutual funds can be very crucial to protect the market from becoming unattractive to the investor. The question is yet not clearly answered why the SEC is reluctant to allow the funds to do so. Or why the SEC has to go to court to decide on such an issue which has
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been practiced globally for ages? Whatever the answers are, this decision is extremely important for the current market condition for the mutual funds. An unattractive market may go down severely, destroying the confidence and expectations of the general investors, if the decision becomes negative from the High Court. To save the market and help it keep on track with global practices, and considering the investors' psychology and the future of mutual fund market, the decision deserves to be in favour of the investors. May the SEC realize it.