Bangladesh Institute of Capital Market (BICM) in a recent study has found 11 barriers – including a lack of expertise and insufficient tax benefit – to investment in mutual funds.
Due to the problems, it said, mutual funds could not attract investors and failed to contribute properly to the capital market.
The barriers include an extension of tenure for close-end mutual funds, lower demand, investment in non-approved securities, the presence of more asset managers, a lack of awareness among investors and a lower financial literacy rate.
Absence of the ranking of asset managers, frequent changes of regulator's position, high fees charged by asset managers, and the unusual tax burden on unitholders at liquidation are the other problems mentioned in the study released on Tuesday.
Kashfia Sharmeen, assistant professor at BICM, presented the research paper titled "Problems and Prospects of Investing in Mutual Funds: The Case of Bangladesh" at a seminar on "BICM Research Seminar-4".
Presided over by Dr Mahmuda Akter, executive president of BICM, Mahmud Hussain, chairman of CVC Finance, Mir Ariful Islam, managing director of Sandhani Asset Management, were also present at the seminar.
According to the BICM research, asset management companies' investment in the capital market is less than 3%. To date, Bangladesh Securities and Exchange Commission (BSEC) has issued 48 licences to asset management companies but many of them are not managing the funds. Thus, it is more likely that many asset managers may not have expertise in this area.
The study also found that many investors invested in a mutual fund, but they do not know how to operate the fund. They need to know who they are accumulating funds and for which purpose, how they are investing their funds, and where they are investing. At present, the literacy rate is far below the expected rate.
Kashfia Sharmeen said, "We documented in our secondary data analysis that most mutual funds are not performing well. Absence of ranking of asset managers makes it even worse."
She said, according to the mutual fund rules, asset managers can charge from 1-2.5% as commission and fees which is quite high compare to other countries. In the USA, they are charging only between 0.25 and 0.27% of their net asset value which means asset managers in Bangladesh are charging ten times more compared to the USA.
The research found that an asset manager had invested Tk95.60 crore in different non-approved private equities. The securities regulator issued a directive to pull out funds invested in non-approved private equities by June 2015. However, fund managers failed to collect this invested money. All these irregularities sent a terrible signal to unitholders.
According to the study, most of the funds' average return is less than 10%. Due to such a poor return, most of the close-end mutual funds are traded below the face value of Tk10 for a long time.
BICM conducted the research on 120 individual investors and most of the investors thought mutual funds have insufficient investor advisors, a lack of knowledge in management, and a poor dividend policy.
BICM also made some recommendations to boost mutual funds.
The recommendations include the regulator should not extend the tenure of the closed-end mutual funds any further and for investment in non-approved securities, the regulator should come forward and take appropriate measures against all bad practices.
The securities regulator should rethink the necessity of a new asset manager before giving a permit where existing fund managers are not managing funds properly and the fees charging by asset managers need to be reduced from the upper range of 2.5%, according to the other recommendations.
Mahmud Hussain highlighted the knowledge gap between the parties involved in mutual funds among the existing problems in the current market and urged BICM to conduct various certification programmes to ensure the efficiency of all parties involved in overcoming these limitations.