Finance ministry's intervention slows down approval of mutual fund

Delay in giving decision by the Securities and Exchange Commission (SEC) on the floatation of a number of mutual funds clouds the prospects of the growing mutual fund segment of the capital market, experts said.

More than 30 proposals for floating mutual funds have been awaiting approval of the securities regulator for months. The SEC has not been able to give its decision for more than a year in the case of a few proposals.

The SEC, according to sources, has been deliberately delaying the approval following the finance ministry's decision to allow more mutual funds in phases. The commission had earlier set up a separate wing for expediting the approval of mutual funds about a year back.

SEC chairman Ziaul Haque Khandaker told the FE that one of the reasons for the delay in approval was the directive issued in June last to offer 50 per cent of the total size of the each fund for public subscription.

"The decision of the ministry to allow MFs in phases will hinder the growth of the industry," said Wali-Ul-Maroof Matin, a leading capital market expert. "The concept that too many mutual funds would have a negative impact on the market is wrong," he said.

"Mutual funds should account for at least 15 per cent of the total market capitalization to help stabilize the market," Matin said adding that the mutual funds market cap is negligible here compared to that of our neighbors like India and Pakistan.

Moin Al Kashem, chief executive officer of Prime Finance Asset Management Company (AMC), who also holds the same view, said, "The slow approval process will nip the industry in the bud." Mutual funds are necessary to minimise the risks of the small investors and reduce the market volatility as they are managed by professionals, " he added.

The mutual fund industry in Bangladesh is among the fastest growing financial services. During the last two years, 10 out of the total 12 asset management companies began operation.

" A mutual fund, managed by competent professionals, can reduce market volatility and risk of loss by retail investors," said Hasan Imam, chief executive officer and managing director of the RACE AMC.

A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund's prospectus. A mutual fund pools investors' money and invest the same in securities on their behalf.

Yawer Sayeed, a leading fund manager, said, "As per the mutual fund rules, a full and complete application is to be consented by the commission within 30 days."

"Therefore, micromanagement attempted by the ministry of finance undermines the authority of the SEC and its rules," he said.

On the question whether there are too many mutual funds coming to the market in Bangladesh, a study by Argus Research, a capital market research organization, shows that mutual fund assets in the neighboring countries like India and Pakistan account for more than 14 per cent and 9.0 per cent respectively of the total market capitalization of those countries. While in Bangladesh, mutual funds' share in the total market capitalization is only 1.0 per cent.

Statistics show that that the mutual fund industry's growth has not kept pace with the growth of the market capitalization in Bangladesh; from 2006 to 2009 mutual fund asset have declined from 1.6 per cent to 1.0 per cent of overall market capitalization.

Ehsan Kabir, senior analyst at Argus Research, said " Between 2006 and 2009 the share of the mutual fund industry has declined from 1.6 per cent to only 1.0 per cent in the overall market capitalization of DSE."

Therefore the data does not support the common perception that the mutual fund industry is becoming too large too fast. Actually, the opposite has taken place, he added.

The proposed mutual funds awaiting the SEC approval include, IDLC First Mutual Fund, BGIC First Mutual Fund, Reliance Insurance Mutual Fund, Prime Finance Second Mutual Fund, Rupali Life Insurance MF, SIBL First Mutual Fund, Northern General Insurance First Mutual Fund, Prime Finance Open End Mutual Fund, IFIC First Mutual Fund, EBL NRB Mutual Fund, People's Life Insurance Mutual Fund, Janata Bank First Mutual Fund, AB Bank Client Mutual Fund, Trust Bank NRB Mutual Fund and PHP First Mutual Fund.