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Term Paper

Mutual Funds in Bangladesh


Problems & Prospects

Group 7

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Table of Contents
1.1 What is Mutual Fund?.................................................................................................................................. 3 2 Mutual Fund: The an!ladesh "#enario........................................................................................................... $ 3 road %b&e#ti'e.................................................................................................................................................. $ $ "pe#ifi# %b&e#ti'es............................................................................................................................................. $ ( Methodolo!)....................................................................................................................................................... ( * "#ope.................................................................................................................................................................. ( 7 +o, are Mutual Funds formed?........................................................................................................................ * 7.1 Parties needed to laun#h a mutual fund...................................................................................................... * 7.2 Who #an be "ponsor of a Mutual Fund? ..................................................................................................... * 7.3 Who ma) be a Trustee of a Mutual Fund?................................................................................................... * 7.$ Who ma) be a Custodian of a Mutual Fund?............................................................................................... 7 7.( Who ma) be the -sset Mana!ement Compan) of a Mutual Fund?............................................................7 7.* .is/s in'ol'ed in Mutual Funds................................................................................................................... 7 7.*.1 General .is/........................................................................................................................................... 0 7.*.2 12ternal .is/......................................................................................................................................... 0 7.*.3 Mar/et .is/........................................................................................................................................... 0 7.*.$ 3i'idend .is/........................................................................................................................................ 0 7.*.( 4nderl)in! 5i6uidit) .is/..................................................................................................................... 0 7.*.* 7n'estment "trate!) .is/...................................................................................................................... 8 7.*.7 Credit .is/............................................................................................................................................. 8 7.*.0 7nterest .ate .is/.................................................................................................................................. 8 0 Wh) in'est in mutual funds? 9 The enefits....................................................................................................8 0.1 -d'anta!es................................................................................................................................................... 8 0.1.1 Professional Mana!ement..................................................................................................................... 8 0.1.2 3i'ersifi#ation ....................................................................................................................................... 8 0.1.3 1#onomies of "#ale................................................................................................................................ 8 0.1.$ 5i6uidit) ................................................................................................................................................ 8 0.1.( "impli#it) ............................................................................................................................................ 1: 0.2 Parameters used to e'aluate Mutual Fund "#hemes................................................................................1: 8 T)pes of Mutual Funds.................................................................................................................................... 1:

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8.1 %pen; 1nded Mutual Fund ........................................................................................................................ 1: 8.2 Closed; 1nded Mutual Fund...................................................................................................................... 1: 8.3 16uit) Mutual Fund Cate!ories.................................................................................................................. 11 8.$ ond Mutual Fund Cate!ories.................................................................................................................... 11 1: Mar/et Condition of MFs in an!ladesh........................................................................................................ 11 11 Problems Fa#ed b) MFs in an!ladesh.......................................................................................................... 12 11.1 3i'ersifi#ation............................................................................................................................................ 12 11.2 5i6uidit).................................................................................................................................................... 12 11.3 .e!ulator) 7ssue........................................................................................................................................ 12 11.$ Fault) finan#ial reportin!.......................................................................................................................... 13 11.( "mall "i<e of the Mutual Fund 7ndustr)................................................................................................... 13 11.* Fe,er %pen;ended Mutual Funds............................................................................................................ 13 12 Future Prospe#ts of MF in an!ladesh.......................................................................................................... 13 13 Corporate !o'ernan#e..................................................................................................................................... 17 13.1 7mpro'ement "#opes in .e!ulations........................................................................................................ 10

7ntrodu#tion
1.1 What is Mutual Fund?
A Mutual Fund is a professionally managed collective investment scheme that pools money from many investors and invests typically in securities (stocks, bonds, short term money market instruments, other mutual funds and other securities) on behalf of the investors/unit holders and distributes the profits. According to basic financial theory an investor can reduce his risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in ust one asset, the entire fortunes of your portfolio depends on this one asset. !y creating a portfolio of a variety of assets, this risk is substantially reduced. "o, the basic concept of mutual funds is to allo# investors #ith limited funds to diversify into various stocks and reduce their risks. !ut that does not necessarily mean that mutual fund investments are totally risk free. They have the same basic risks as investing

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into any other e$uities. !ut as they are managed by professionals, these securities tend to e%perience a significant decline in the level of controllable risks.

2 Mutual Fund: The an!ladesh "#enario


According to "ecurities and &%change 'ommission (Mutual Fund) (ules, )**+, a mutual fund is created as a trust to collect money from public by selling unit of one or more than one scheme to invest the fund in money market instruments. According to this rule , money market instrument means all securities of short term security market including, short,term commercial paper, commercial bill, treasury bill, certificate of deposit, etc. !efore this report moves for#ard to focus more closely on the Mutual Funds of !angladesh, the upcoming portion #ill cover on some more basics about mutual funds #hich include formation structure, risks - advantages of mutual funds, their evaluation techni$ues, types etc.

Problem 7dentifi#ation = %b&e#ti'e


3 road %b&e#ti'e
To identify the core problems and future prospects of mutual fund in !angladesh by revie#ing the current market scenario and analy.ing the performance of these mutual funds over the years.

$ "pe#ifi# %b&e#ti'es
The broad ob ective has been dissected into the follo#ing specific ob ectives/ +. To get an understanding of the concept of mutual fund ). To get an overvie# of the mutual funds market of !angladesh 0. Analy.e the performance of mutual funds

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1. 2dentifying the key issues that affect the performance of mutual funds of !angladesh 3. 2dentifying the key opportunities for the improvement of the current scenario of the mutual funds of !angladesh 4. 5roviding probable strategies by integrating the positive factors and opportunities to mitigate the risks and threats faced by the mutual funds sector of !angladesh. 2n order to get a concrete understanding of the mutual fund, the report #ill talk about ho# a mutual fund is formed, types of mutual funds and the risks and advantages associated #ith mutual funds. The report #ill also try to give a brief overvie# of the history of mutual funds in !angladesh #hich #ill entail #hen the concept of mutual funds #as implemented in !angladesh and the current standing of this sector. To understand the underlying problems and opportunities, performance of the mutual funds #ill be measured based on historical and currently available market data. Finally probable solutions #ill be provided based on the findings of the analysis.

( Methodolo!)
The study #ill be mainly based on e%ploratory research and secondary data. 6ifferent books - ournals such as the annual reports published by the mutual funds, company7s #ebsites, preceding studies #ill be used to get an insight8 5rimary information regarding mutual funds #ill be gathered through personal intervie#s of some of the officials of the relevant organi.ations. For financial performance analysis, at first #e #ill take the data of stock market inde% (dgen) for a given time period and then #e #ill find the data of mutual find prices (for the listed MFs) for the same time period to compare the percentage change in each of these. 9e #ill also be using e%tensive e%ploratory research to identify the problems that the MF sector faces in !angladesh and also some e%pert opinions on the gro#th prospect of MFs.

* "#ope
For analy.ing the performance, Mutual funds listed in 6haka "tock &%change #ill be considered.

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Primar) >ualitati'e
7 +o, are Mutual Funds formed?
7.1 Parties needed to launch a mutual fund
To launch a Mutual Fund follo#ing parties are re$uired/ "ponsor Trustee 'ustodian Asset Manager

A sponsor #ill appoint Trustee, 'ustodian and Asset Manager for the proposed Fund.

7.2 Who can be Sponsor of a Mutual Fund?


As per the "ecurities and &%change 'ommission (Mutual Fund) (ules,)**+, "ponsor is a !ank, Finance or 2nsurance 'ompany or "tatutory :rgani.ation #ho singly or ointly can form a mutual fund #ith another !ank, Finance or 2nsurance 'ompany, "tatutory :rgani.ation (ecogni.ed (egistered Trust Fund, 5ension Fund, 5rovident Fund or "uper Annuation Fund. There may be single or multiple sponsors for a Fund.

7.3 Who may be a Trustee of a Mutual Fund?


Trustee of a Mutual Fund must be registered by the 'ommission under the Securities and Exchange Commission (Mutual Fund) Rules-2001. 'urrently there are 3(five) registered Trustees in the market. They are/ 2. 22. 222. 2nvestment 'orporation of !angladesh (2'!) and !angladesh ;eneral 2nsurance 'ompany <td. (!;2') "andhani <ife 2nsurance 'o. <td.

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2=. =.

!rac !ank <td. &astern !ank <td.

7.

Who may be a !ustodian of a Mutual Fund?

'ustodian of a Mutual Fund must be registered by 'ommission under the Securities and Exchange Commission (Mutual Fund) Rules-2001. 'urrently there are 1(four) registered 'ustodian in the market. They are/ 2. 22. 222. 2=. 2nvestment 'orporation of !angladesh (2'!) and "tandard 'hartered !ank ("'!) !rac !ank <td. 'itibank >.A

7." Who may be the #sset Mana$ement !ompany of a Mutual Fund?


An Asset Management 'ompany of a Mutual Fund must be registered by the 'ommission under the Securities and Exchange Commission (Mutual Fund) Rules-2001. 'urrently there are ++(eleven) registered Asset Management 'ompanies in the market. They are/ 2. 22. 222. 2=. =. =2. =22. =222. 2?. ?. ?2. 2'! Asset Management 'ompany <td. !angladesh 6evelopment !ank Assets - 2nvestment Management "ervices of !angladesh <td. (A'& Management 5rivate 'ompany <td. <( ;<:!A< !angladesh Asset Management 'ompany <td. 5rime Finance Assets Management 'ompany <td. =25! Asset Management 'ompany <td. Alif Asset Management <td. >ational Asset Management <td. 2nvest Asia 'apital and Asset Management <imited. Alliance 'apital Asset Management <td.

7.% &is's in(ol(ed in Mutual Funds


A very important risk involved in mutual fund investments is the market risk.

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That is because mutual funds are basically a compilation of various stocks from the market. 9hen the market is in doldrums, most of the e$uity funds #ill also e%perience a do#nturn. 2n turn mutual funds #ill also suffer from loss. @o#ever, the company specific risks are largely eliminated due to professional fund management. The risk in a particular scheme of a mutual fund is basically a function of t#o factors/ +. The >ature of the scheme and Market risk. ). 2nvestment e%pertise of the Asset Management 'ompany (AM'). These factors give rise to the follo#ing risks/
7.%.1 )eneral &is'

There is no assurance that the Fund #ill be able to meet its investment ob ective and investors could potentially incur losses, including loss of principal #hen investing in the Fund. 2nvestment in the Fund is not guaranteed by any government agency, the "ponsor or the AM'. Mutual funds and securities investments are sub ect to market risks and there can be no assurance or guarantee that the Fund7s ob ectives #ill be achieved.
7.%.2 *+ternal &is'

The possibility that political events (a #ar, national elections), financial problems (rising inflation, government default), or natural disasters (an earth$uake, a poor harvest) #ill #eaken a countryAs economy and cause investments in that country to decline.
7.%.3 Mar'et &is'

The possibility that stock fund or bond fund prices overall #ill decline over short or even e%tended periods. "tock and bond markets tend to move in cycles, #ith periods #hen prices rise and other periods #hen prices fall.
7.%. ,i(idend &is'

This is the possibility that a fi%ed,income fundAs dividends #ill decline as a result of falling overall interest rates.
7.%." -nderlyin$ .i/uidity &is'

The possibility that market conditions and investment allocation may have an impact on the ability to sell securities during periods of market volatility may limit the ability to sell the investments and lead to the Fund incurring losses till the security is finally sold.
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7.%.%

0n(estment Strate$y &is'

The possibility that an actively managed mutual fundAs investment adviser #ill fail to e%ecute the fundAs investment strategy effectively resulting in the failure of stated ob ectives.
7.%.7 !redit &is'

This is the possibility that a bond issuer #ill fail to repay interest and principal in a timely manner. Also called default risk.
7.%.1 0nterest &ate &is'

This is the possibility that a bond fund #ill decline in value because of an increase in interest rates. :r the possibility that falling interest rates #ill cause a bond issuer to redeemBor callBits high, yielding bond before the bondAs maturity date.

0 Wh) in'est in mutual funds? 9 The enefits


Mutual funds have certain advantages above other securities. These are/

1.1 #d(anta$es
1.1.1 Professional Mana$ement

The basic advantage of funds is that, they are professionally managed, by #ell $ualified professionals. 2nvestors purchase funds because they do not have the time or the e%pertise to manage their own portfolio. A mutual fund is considered to be relatively less e%pensive #ay to make and monitor their investments.
1.1.2 ,i(ersification

5urchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimi.ed up to certain e%tent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimi.ed by gains in others.
1.1.3 *conomies of Scale

Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring do#n the average cost of the unit for their investors.
1.1. .i/uidity

Cust like an individual stock, mutual fund also allo#s investors to li$uidate their holdings as and #hen they #ant.

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1.1."

Simplicity

2nvestments in mutual fund are considered to be easy, compare to other available instruments in the market, and the minimum investment is small.

1.2 Parameters used to e(aluate Mutual Fund Schemes


5erformance of mutual funds can be measured in various #ays. "ome of the basic measurement parameters used for evaluating mutual funds includes/ total returns given by the fund on different schemes, the returns on competing funds, the ob ective of the fund and the promoter7s image

These should be considered #hile taking an investment decision regarding mutual funds.

8 T)pes of Mutual Funds


Mutual funds can be categori.ed in various #ays. The basic classification is based on ho# they are structured. That is, #hat sort of subscription does it offer, are there a maturity period for the schemes, si.e of the mutual funds etc. "tructure #ise there are t#o different kinds of Mutual funds. They are/

2.1 3pen4 *nded Mutual Fund


An open,end fund is one that is available for subscription all through the year. These do not have a fi%ed maturity. 2nvestors can conveniently buy and sell units at >et Asset =alue (D>A=D) related prices. The key feature of open,end schemes is li$uidity.

2.2 !losed4 *nded Mutual Fund


A closed,end fund has a stipulated maturity period #hich generally ranging from 3 to +3 years. The fund is open for subscription only during a specified period. 2n this case, the total si.e of the fund is limited by the si.e of the initial offer. These types of fund are al#ays listed in the stock e%change for li$uidity.

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Another #ay to categori.e the mutual fund is based on the certain types of securities that these funds invest on. This classification #ould be like this/

2.3 */uity Mutual Fund !ate$ories


Growth Fund Capital Appreciation Fund Growth and Income Fund International and Global Fund Specialty Fund Index Fund Fund of the Fund

2.

5ond Mutual Fund !ate$ories


Income Fund Tax Free fund High-yield Bond Fund International and Global Bond Fund

Performan#e -nal)sis
1: Mar/et Condition of MFs in an!ladesh
"

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Problems = Prospe#ts in an!ladesh


11 Problems Fa#ed b) MFs in an!ladesh
11.1 ,i(ersification
:ne of the ma or issue regarding Mutual Funds in !angladesh is the fact that they have very limited options for investment. As there is no bond market in !angladesh and options, derivatives are not as popular or even available in the market. "o that limits the options for mutual funds to invest in bet#een e$uity stocks or F6(s #ith banks. "o all the mutual funds that are there in the market, a portion of them is invested into the stock market #hile the other portion is kept as F6( #ith !anks. The limited options for investment slo# do#n the gro#th of this market thus hampering the overall performance as #ell. Also lo#er levels of diversification means higher levels of risk. "o basically limited opportunity of diversification hampers the mutual funds7 ability to minimi.e risk up to the level that are usually achieved by mutual funds in the international market.

11.2 .i/uidity
Mutual funds usually try to invest into stocks that have basically good fundamentals. That is, stocks #ith good returns, comparatively lo#er risks etc. These stocks ensure that money invested in the stocks are safe and secure as they are less volatile. !ut some of these stocks have certain issues. There are certain fundamentally good stocks that are illi$uid. These stocks are good if the basics are considered, like returns and gro#th but they are illi$uid due to the fact that there are not enough buyers or sellers #ho are #illing to trade them, thus failing to achieve enough volume of trading to make a profit. These stocks tie up the funds as long as they are not sold.

11.3 &e$ulatory 0ssue


:ne ma or regulation from "&' regarding mutual funds is that Mutual Funds have to invest around 1*E of their portfolio into other mutual fund. This makes the mutual funds dependent on each other and thus making the #hole market much more risky than it should be.

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This rule at one side compels the mutual fund managers to be more careful about managing and investing the funds. !ut at the same time it poses a serious threat to the #hole mutual funds market. As there are very fe# players in the market and the overall si.e is very small, this interdependency of mutual funds might result in a domino effect in the situation of an economic do#n turn/ failure of t#o or three Mutual Funds in the market may result in a complete collapse of the #hole market.

11. Faulty financial reportin$


Many of the e%isting mutual funds do not follo# 2F(" properly for their financial reporting. The reported &5" or other information that influences investor decisions are not at all supported by the fundamentals. >ot follo#ing proper rules or regulations in financial reporting of the mutual funds may mislead investors. This misleading and manipulation might benefit some investors #ith inside information but the overall market volatility resulting from this #ould eventually hamper the acceptability of mutual funds and thus hampers the total market condition.

11." Small Si6e of the Mutual Fund 0ndustry


Another ma or issue is the fact that the si.e of the entire industry is very small. 'urrently it is around F"6 3** Million #hich is considered to be very small by general standards. This discourages foreign investor to invest into the market #hich in turn restricts the gro#th of this industry, si.e #ise speaking.

11.% Fe7er 3pen4ended Mutual Funds


Most of the funds in the market of !angladesh are close ended. That means they mature is a specific period of time. This also limits the number of investors #ho can get into the market. This in turn restricts the volume of trading that can be done in the Mutual funds market.

12 Future Prospe#ts of MF in an!ladesh


2nvestment in mutual funds units is comparatively safer as they have been trading on the stock market near the net asset value (>A=). 2ncrease in the number of mutual fund units is a positive sign for the capital market as it helps the market achieve sustainable development. As of )*+) 1+ MF units #orth Tk. +)0.11 billion are being traded on the 6haka "tock &%change (6"&), contributing +.0* per cent of the total market capitali.ation. Around 4* MF units are also in

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the pipeline to go public after submitted their prospectus to the "ecurities and &%change 'ommission ("&') for approval. <ack of kno#ledge about MF units ho#ever leaves a large segment of investors confused about it. !angladesh has a very small market for mutual funds. As of )*+), there #ere 1+ MFs in the countryAs capital market. For them, MF rules #ere framed by the "ecurities and &%change 'ommission ("&'). Fnder the rules, a fund consists of one sponsor/entrepreneur, one trustee and obviously a fund manager. 2t is re$uired for every such company to get permission of the "&' before proceeding #ith its fund allocation process. 2f #e look at the performance of MFs in four consecutive years , )**G, )*+*, )*++ and )*+), #e see that the >A=s (>et Asset =alue) of MFs, as in Table +, hit sky,high in )*+*. The year )*+* #as a boon for the mutual fund units as a total of +* funds debuted on the stock market at that time raising Tk. +0.0* billion. The amount of fund raised through MF units shot up by 3*E, or Tk. 4.43 billion, during the period, according to official statistics. :f the Tk. +0.0* billion, sponsors funded Tk. +.G* billion, or +1.)HE, #hile Tk. 4.I3 billion, or 3*.I3E, has been raised through initial public offering (25:) and the rest Tk. 1.43 billion, or 01.G4E, through pre, 25: or private placement. The unusual rise in >A=s #as not natural. 2t happened, #hen the share market sa# formation of a bubble that ultimately burst and investors #ere affected. Though the >A=s in )**G #ere not that high, still it #as really a potential year for the capital market compared to )*+*, )*++ and even )*+). The rise in >A=s then #as $uite natural. "o it is clear that the overall performance of MFs in the fiscal year )**G in vie# of >A= #as comparatively good. @ere >A= is a very good indicator, because, if the dividend rate and the profit margin of an MF change, its >A= also changes. 2n )**G, the number of MFs #as +G. 2n )*+* the number rose to 0+. That means only +) MFs entered the market in the year. 2n )*++, the number of MFs rose to 0I and in )*+), it stood at 1+. The figures sho# a gradual fall in the number of MFs entering the market during the period of four years. @o#ever, in terms of issued capital and certificates of MFs, this particular sector #as $uite inactive in )**G and )*+*. 6uring the period the number of MFs #as lo#, though there should be at least 3* MFs in the market. The total number of MFs in )**G #as +G #hile 0H3 certificates #ere issued and

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the issued capital #as Tk. 1,)+I million only. 2n )*+* the number of certificates issued #as +,01* and the issued capital Tk. +0,I+3 million. 2n )*++ and )*+), the MFsA performance slightly improved in terms of the number of certificates and the issued capital. !ut the total number of MFs did not improve that much. 6uring the crisis period of the capital market in )*+* both market capitali.ations and turnover of MFs #ere lo#er in percentage points, compared to )**G, as is seen in the ;raph,). !ut it #as gradually improving from )*++. 2n )**G the turnover of MFs #as 3.*G million, in )*+* it declined to +.G* million and in )*++ it slightly improved to 0.1G million. :n the other hand, the percentage of MFsA market capitali.ation #as 1.00 in )**G, +.1+ in )*+* and +.4+ in )*++. "o it is clear that the percentage has seen a gradual fall and it is an ominous sign for the market. @o#ever, the market of MFs in )*+) gives some positive signals. Though the dividend declaration decreased in )*+) compared to )*++, the price,earnings (5/&) ratio increased #hile the &5" (earnings per share) fell. The MFs on the 6;&> (6"& ;eneral 2nde%) also sa# a positive trend. The latter three indicators give positive signals about the market of MFs. 2n such a situation focus needs to be more and more on ho# to make further improvement in those areas. Actually, our MF and bond markets are not that developed despite immense potential. 9e need to e%plore this opportunity to reduce the banking sectorAs dominance in the capital market.

Jear 6ividend 5/& &5" 6;&>

)**I 10.10 )*.)G )4.4* 0,*+I

)**H 0G.30 )*.0I 0*.+* ),IG3

)**G 0).I4 )G.*4 0*.+) 1,304

)*+* 00.IG +I.30 )).GH H,)G*

)*++ 43.IH 4.)1 )+.0I 3,)3H

)*+) 14.4* +).1) ++.04 1,)+G

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The unusual surge in MFsA prices/ As already mentioned, the MF sector in !angladeshAs capital market is mostly inactive. 2n this rigid capital market during the period of early )*+*,late )*++ the prices of MFs #ere sky,high. Many corrupt companies took this advantage to invest Tk +4.H03 billion (+,4H0.3* crore) in MFs through placement business (see Table 0). Though the related rules provide for investment of ma%imum I3 per cent of an MFAs fund in the capital market, none of the MFs follo#ed the rules. As a result, the >A= of MFs #ent do#n and thus the market of MFs crashed due to inefficient fund management. The success and failure of MFs completely depend on the portfolio managers. !ut, the portfolio managers proved to be unreliable and the corrupt placement business destroyed the sector #hile the profits #ent into the companiesA pockets. Furthermore, #hether the money #as invested in the market or not is totally unkno#n. 5reviously the government had decided to form an e%clusive mutual fund to conduct key trading in the market. 2n this regard, an open,ended mutual fund titled A!angladesh FundA #as formed under the sponsorship of the 2nvestment 'orporation of !angladesh (2'!) and seven other state,o#ned banks. This fund formally started its operation on May *3, )*++. 2ts target #as to divest shares #orth Tk. 3* billion (Tk. 3,*** crore). !ut there arose a $uestion as to ho# transparently and efficiently the mutual fund #ould be managed, #hen the e%isting fund management #as not that encouraging, particularly, #hen most of the shares #ere overvalued. !ut after announcement of the !angladesh Fund package 6haka "tock &%change transactions moved $uite radically in a month in )*++. "o, the fund could not help stabili.e the market, rather it created an artificial demand in the market. 'urrent performance of the mutual funds in the secondary market of !angladesh yet has not been note#orthy. The return is #ell belo# the annuali.ed market return of appro%imately )GE in the 6haka "tock &%change. :n the contrary, investors have gained around 03*E of return on the last si% mutual funds participating in their 2nitial 5ublic :fferings (25:) even if those investors had sold them #ithin ne%t three months after the first day7s trade. This situation has motivated many investors to participate in the private placement and 25: of the mutual funds in the recent years. 2t has attracted a good number of investors #ith a substantial amount of investment although larger portion of the investors #ere not able to participate due to limited supply. (eali.ing this high demand supply gap in the private placement and 25:, in the recent times there have been many ne#

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issuers of mutual funds #ho have already finished the formalities #ith the regulators, and many others #hose proposals are on the board positively. This is essentially a strong signal for the development of an organic capital market offering a safe alternative investment avenue for the investors that really can reduce the e%cessive and aggressive dependence on e$uity stocks. !ut things have become little bit difficult at the same time. Although at the pre,25: or 25: phase investors are profiting #ell, secondary market for mutual funds has remained much less profitable still. "ince, investors are not really impressed by the marginal performance investing in the mutual funds8 they feel reluctant to put money in mutual funds in the secondary market. Many of the investors have complained of #aiting too long for a point difference benefit or facing forced sale to avoid further loss and recover he opportunity loss. Therefore, the conse$uence is clear. A dull secondary market for mutual funds have been restricting investors to take its advantage properly, and thus making more investors negative to it everyday. <ess demand in the secondary market is essentially making the 25:s or 5rivate placements much less attractive since investors at these stages are in fear of losing money or illi$uidity of their investment in the current status of the secondary market for mutual funds. Thus recently, talking to couple of potential fund issuers, a fear of illi$uidity for their potential ne# fund issues has been noticed. This is $uite logical, rational, inevitable, and the crude realty. 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 market from further unattractive to the investor. The $uestion is yet not clearly ans#ered #hy the "&' is reluctant to allo# the funds to do so. :r #hy the "&' has to go the court to decide on such issue #hich has been practiced globally for the ages is not clear either. 9hatever the ans#ers are, this decision is e%tremely important for the current market condition for the mutual funds. The unattractive market may go do#n severely breaking do#n the confidence and e%pectations of the general investors, if the decision becomes negative from the @igh 'ourt. To save the market keeping on track #ith global practices, and considering the investors7 psychology and future of mutual fund market, the decision deserves to be in favor of the investors.

13 Corporate !o'ernan#e

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"ince then the AM's #ith mutual funds has gro#n in e%cess of Tk. 03** crore #ith over H*E of the fund being managed by private sector AM's. To protect the interest of the investors, "&' prescribed a structure to be follo#ed by the financial institutions and mutual funds alike. The structure depends upon independent directors and statutory auditors. 2n order to safeguard investors7 money in the current unstable situation of !angladesh stock market, corporate governance guidelines have been institutionali.ed. 'orporate governance is the system by #hich companies are directed and controlled. 2t considers such matters as ho# board of directors operate the role of e%ecutive, compensation in determining firm performance, and the role of multiple shareholders. 'orporate governance in financial intermediary7s (mutual funds) in !angladesh is a paramount issue as economic reforms have not only increased gro#th prospects, but they have also made markets more competitive. This means that in order to survive companies #ill need to invest continuously on a large scale. And due to this large scale investment it is imperative for firms to rely on capital markets to a greater degree for their needs of additional capital. 2t is prevalent that the mutual fund industry is still very small in !angladesh, but it handles pool fund of large sum of money for a large number of investors. Thus corporate governance is very important in order to protect the rights of the shareholders. @enceforth, "&' plays a ma or role in controlling regulations of mutual funds.

13.1 0mpro(ement Scopes in &e$ulations


+. A minimum si.e of the board is set by the "&' regulations and most AM's are follo#ing it. !ut in an over#helming ma ority of the non,bank listed companies, the board is heavily dominated by sponsor shareholders #ho generally belong to a single family. The boards are actively involved in management. Most independent directors represent current or former government officials or bureaucrats. They are appointed directors to assist company in getting licenses or as payback for previous favors. 2n the conte%t of !angladesh, independent directors do not act as an advocate for minority shareholders or as a source of innovative ideas (!&2, )**0). ). The 'hairmen of the AM's and Trustee companies are chosen out of the independent director. !ut the 'hairman and the 'hief &%ecutive officer simultaneously should not be the same person and the !oard should clearly define their respective roles and responsibilities.

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Term Paper

0. For better governance, the corporate governance guidelines should demand from the AM's a financial statement that presents fairly companyAs state of affairs, the results of its operation, cash flo#s and change in e$uity. The statement should have/ Accounting estimates based on reasonable and prudent udgment 'onsistent application of appropriate accounting policies 2A" follo#ed in preparation of the financial statements 6isclosure on companyAs ability as a gro#ing concern and if not so then the fact along #ith the reasons thereof, &%planation on the significant deviation from last year in operating results, if so happened "ummari.e of at least last three years key operating and financial data "ignificant plans and decisions along #ith future prospects and risks >umber of !oard Meetings held during the year and attendance by directors, Aggregate number of shares held by/ 5arent/"ubsidiary/Associate companies, 6irectors, '&:, 'ompany "ecretary, 'F:, and @ead of 2nternal Audit. &tc "hareholders holding ten percent or more voting interest in the company

The guidelines #ill definitely help to protect the rights of minority shareholders as #ell as ensure more transparency and accountability in the Management of the AM's. 1. The numbers of auditors are very limited and this might be a source of risk to the investors. To ensure there is no collusion bet#een the auditors and the AM', the "&' can implement an audit committee. Audit committee tries to enhance the ability of the board to fulfill its legal responsibilities and ensure the credibility and ob ectivity of the financial reports. An audit committee must be composed of ma ority of independent or non,e%ecutive directors #ho are neither officers or employee of the company. "uch a committee should act as a communication link bet#een management, auditors, and the governing body. 3. There is no regulation given regarding the number of independent directors on the !oard of Trustees. 2t varies from board to board and there is even on !oard of Trustee that does not have any independent director. The "&' should look into it and set a specific guideline for the number of independent director on a !oard of trustee.

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Term Paper

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