Executive summary

Mutual fund is a very useful investment mechanism in a capital market. A developed capital
market consists of varieties of investment instruments and mutual fund is one of them. But
the share of mutual funds in Bangladesh's capital market is very low. The market is fully
equity-based and there is little scope to introduce any new financial instrument. That's why a
rapid development has not happened in this sector. But mutual fund can be a good investment
alternative in this undiversified market. Moreover, as the price /NAV ratio is 0.60 the whole
mutual fund market is now being traded at 40% discount.




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.
In other words, a mutual fund allows an investor to indirectly take a position in a basket
of assets.
How do Mutual Funds diversify risk?
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 just one
asset, the entire fortunes of your portfolio depends on this one asset. By creating a
portfolio of a variety of assets, this risk is substantially reduced.

Can Mutual Fund be considered as risk free investment?
Mutual fund investments are not totally risk free. In fact, investing in mutual funds bears
the same risk as investing in the equities, the only difference is that due to professional
management of funds the controllable risks are substantially reduced.
Types of risk
Market risk is the important risk associated with mutual funds. If market is doldrums all
of the equity firms will face a down trend. But the company specific risk can be fully
eliminated by efficient fund management.
Advantages of investing in mutual funds
Professional Management
The basic advantage of funds is that, they are professionally managed, by well qualified
professionals. Investors purchase funds because they do not have the time or the
expertise to manage their own portfolio. A mutual fund is considered to be relatively less
expensive way to make and monitor their investments.
Diversification
Purchasing units in a mutual fund instead of buying individual stocks or bonds, the
investors risk is spread out and minimized up to certain extent. The idea behind
diversification is to invest in a large number of assets so that a loss in any particular
investment is minimized by gains in others.
Economies of Scale
Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.
Liquidity
Just like an individual stock, mutual fund also allows investors to liquidate their holdings
as and when they want.
Simplicity
Investments in mutual fund is considered to be easy, compare to other available
instruments in the market, and the minimum investment is small.
Parameter to evaluate
Performance indicators are:
Total returns given by the fund on different schemes,
Returns on competing funds,
Objective of the fund and
Promoters image

These are some of the key factors to be considered while taking an investment decision
regarding mutual funds.

Formation of mutual funds
To launch a Mutual Fund following parties are required:
i) Sponsor
ii) Trustee
iii) Custodian
iv) Asset Manager
-Sponsor will appoint Trustee, Custodian and Asset Manager for
the proposed Fund.
Who Can be Sponsor of a Mutual Fund ?
-As per the wewa 2(1)(P) of the wmwKDwiwUR I GP Kwgkb (wgDPzqvj
dv) wewagvjv, 2001;

-Sponsor is a Bank, Finance or Insurance Company or Statutory Organization
who singly or jointly can form a mutual fund with another Bank, Finance
or Insurance Company, Statutory Organization Recognized Registered
Trust Fund, Pension Fund, Provident Fund or Super Annuation Fund.
-There may be single or multiple sponsor for a Fund.
Trustee of mutual fund
Currently there are 5(five) registered Trustees in the market. They are:
1) Investment Corporation of Bangladesh (ICB) and
2) Bangladesh General Insurance Company Ltd. (BGIC)
3) Sandhani Life Insurance Co. Ltd.
4) Brac Bank Ltd.
5) Eastern Bank Ltd.
Custodian of a Mutual Fund?

Currently there are 4(four) registered Custodian in the market. They are:
1) Investment Corporation of Bangladesh (ICB) and
2) Standard Chartered Bank (SCB)
3) Brac Bank Ltd.
4) Citibank N.A
Asset management companies of mutual funds
Currently there are 11(eleven) registered Asset Management Companies in the market.
They are:
1) ICB Asset Management Company Ltd.
2) Bangladesh Development Bank
3) Assets & Investment Management Services of Bangladesh Ltd.
4) RACE Management Private Company Ltd.
5) LR GLOBAL Bangladesh Asset Management Company Ltd.
6) Prime Finance Assets Management Company Ltd.
7) VIPB Asset Management Company Ltd.
8) Alif Asset Management Ltd.
9) National Asset Management Ltd.
10) InvestAsia Capital and Asset Management Limited.
11) Alliance Capital Asset Management Ltd.

Size of the mutual fund industry
Total size of the industry is 1,844.56 tk in crore (according to fund size). Portion of the total size of
the industry held by the top asset management companies are given below:

Figure: percentage of fund size at 04 September 2014
Structure
The asset management companies in mutual fund industry do not face any direct competition
with each other. As the awareness about investing in mutual fund in individual level is
limited and only the corporate bodies are the main investors here, the companies face
moderate rate of competitiveness. If they can manage their fund well they are often entitled
RACE
ICB
VIPB
LR Global
AIMS
41%
8%
18%
4%
19%
with another fund from separate sponsor to manage but they cannot go for issuing new
securities for the existing firm. And all of the publicly traded funds are close ended mutual
fund. Moreover, as the stocks of mutual funds are under-subscription so there is neither
monopoly nor perfect competition.
Composition of the industry

BY STRUCTURE
Open- Ended Mutual Fund :
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
Closed- Ended Mutual Fund :
A closed-end fund has a stipulated maturity period which generally ranging from 5 to 15
years. The fund is open for subscription only during a specified period. In this case ,the
total size of the fund is limited by the size of the initial offer. This types of fund are
always listed in the stock exchange for liquidity.
Equity Mutual Fund Categories:
Growth Fund
Capital Appreciation Fund
Growth and Income Fund
International and Global Fund
Specialty Fund
Index Fund
Fund of the Fund
Bond Mutual Fund Categories:
Income Fund
Tax Free fund
High-yield Bond Fund
International and Global Bond Fund

SL Name of the Fund Initial Fund Size
(TK in Crore)
1 ICB Unit Certificate Tk 10.00
2 ICB AMCL Unit Certificate Tk 10.00
3 ICB AMCL Pension Holders Unit Certificate Tk 10.00
4 Prime Financial Unit Fund Tk 20.00
5 MTB Unit Fund Tk 36.00
6 Shandhani Life Unit Fund Tk 60.00


Critical variable
In case of mutual fund it is often said that NAV is the most important deciding
factor. It reflects the performance of the asset management companies. NAV
shows how well the portfolio of a mutual fund is diversified and risk-return are
optimized. As NAV is the balance of asset and liabilities so the securities where
the fund has been invested are the most critical variable or factor to be decided.
This report shows a specimen of portfolio 2 mutual funds (SEBL 1
st
MF, NLI 1
st

MF) managed by VIPB asset management companies. From this portfolio it is
clear that they invest mostly in those securities which provide certain income.
Most of their invested capital are in bonds, stocks of banks and other mutual
funds. They conduct fundamental analysis and observe trend in the market and
claim themselves as value investor. They takes long position when the market is
down and sell right before the market reach at peak.
Valuation of mutual fund
NAV (Fund)= Value of the Total Asset of the Fund as on date-Total Liabilities of
the Fund as on date
NAV (Per Unit)= Total NAV/ Number of Outstanding Units
Dividend Policy
The amount of total dividend to be declared for the year shall not be less than 70
(seventy) percent of the total net profit earned in the respective year. Dividend should
be distributed among the unit holders within 45(forty five) days of declaration.
Rights of the Unit Holder
Dividend
Tax Benefit
Transferability
Right to Vote
Reports and Accounts
Beneficial Interest

What is mutual fund: A mutual fund is an investment vehicle that is made up of a pool of
funds collected from many investors for the purpose of investing in securities such as
stocks, bonds, money market instruments and similar assets. Mutual funds are operated
by money managers, also known as portfolio managers, who invest such fund's capital
and attempt to produce capital gains and income for their investors. A mutual fund's
portfolio is structured and maintained to match the investment objectives stated in its
prospectus. The portfolio managers apply their investment management skills and
necessary research works to ensure secured return of investors' investment.

Mutual funds in Bangladesh: Bangladesh has a very small market for mutual funds. As of
2012, there were 41 MFs in the country's capital market. For them, MF rules were
framed by the Securities and Exchange Commission (SEC). Under the rules, a fund
consists of one sponsor/entrepreneur, one trustee and obviously a fund manager. It is
required for every such company to get permission of the SEC before proceeding with its
fund allocation process.
Performance of MFs: If we look at the performance of MFs in four consecutive years-
2009, 2010, 2011 and 2012, we see that the NAVs (Net Asset Value) of MFs, as in Table
1, hit sky-high in 2010. The unusual rise in NAVs was not natural. It happened, when the
share market saw formation of a bubble that ultimately burst and investors were
affected. Though the NAVs in 2009 were not that high, still it was really a potential year
for the capital market compared to 2010, 2011 and even 2012. The rise in NAVs then
was quite natural. So it is clear that the overall performance of MFs in the fiscal year
2009 in view of NAV was comparatively good. Here NAV is a very good indicator,
because, if the dividend rate and the profit margin of an MF change, its NAV also
changes.
The growth scenario of MFs: Let us have a look at the overall growth of MFs during the
period of 2009 to 2012. In 2009, the number of MFs was 19. In 2010 the number rose to
31. That means only 12 MFs entered the market in the year. In 2011, the number of MFs
rose to 37 and in 2012, it stood at 41. The figures show a gradual fall in the number of
MFs entering the market during the period of four years.
However, in terms of issued capital and certificates of MFs, this particular sector was
quite inactive in 2009 and 2010 as seen in Graph-1. During the period the number of
MFs was low, though there should be at least 50 MFs in the market. The total number of
MFs in 2009 was 19 while 385 certificates were issued and the issued capital was Tk
4,217 million only. In 2010 the number of certificates issued was 1,340 and the issued
capital Tk 13,715 million.
In 2011 and 2012, the MFs' performance slightly improved in terms of the number of
certificates and the issued capital. But the total number of MFs did not improve that
much.
The growth scenario of MFs: Let us have a look at the overall growth of MFs during the
period of 2009 to 2012. In 2009, the number of MFs was 19. In 2010 the number rose to
31. That means only 12 MFs entered the market in the year. In 2011, the number of MFs
rose to 37 and in 2012, it stood at 41. The figures show a gradual fall in the number of
MFs entering the market during the period of four years.
However, in terms of issued capital and certificates of MFs, this particular sector was
quite inactive in 2009 and 2010 as seen in Graph-1. During the period the number of
MFs was low, though there should be at least 50 MFs in the market. The total number of
MFs in 2009 was 19 while 385 certificates were issued and the issued capital was Tk
4,217 million only. In 2010 the number of certificates issued was 1,340 and the issued
capital Tk 13,715 million.
In 2011 and 2012, the MFs' performance slightly improved in terms of the number of
certificates and the issued capital. But the total number of MFs did not improve that
much.
During the crisis period of the capital market in 2010 both market capitalisation and
turnover of MFs were lower in percentage points, compared to 2009, as is seen in the
Graph-2. But it was gradually improving from 2011. In 2009 the turnover of MFs was
5.09 million, in 2010 it declined to 1.90 million and in 2011 it slightly improved to 3.49
million. On the other hand, the percentage of MFs' market capitalisation was 4.33 in
2009, 1.41 in 2010 and 1.61 in 2011. So it is clear that the percentage has seen a
gradual fall and it is an ominous sign for the market.
However, the market of MFs in 2012 gives some positive signals. As seen in Table-2,
though the dividend declaration decreased in 2012 compared to 2011, the price-earnings
(P/E) ratio increased while the EPS (earnings per share) fell. The MFs on the DGEN (DSE
General Index) also saw a positive trend. The latter three indicators give positive signals
about the market of MFs. In such a situation focus needs to be more and more on how to
make further improvement in those areas. Actually, our MF and bond markets are not
that developed despite immense potential. We need to explore this opportunity to reduce
the banking sector's dominance in the capital market.
Table-2: Market review of mutual funds.
The unusual surge in MFs' prices: As already mentioned, the MF sector in Bangladesh's
capital market is mostly inactive. In this rigid capital market during the period of early
2010-late 2011 the prices of MFs were sky-high. Many corrupt companies took this
advantage to invest Tk 16.835 billion (1,683.50 crore) in MFs through placement
business (see Table 3). Though the related rules provide for investment of maximum 75
per cent of an MF's fund in the capital market, none of the MFs followed the rules. As a
result, the NAV of MFs went down and thus the market of MFs crashed due to inefficient
fund management.
The success and failure of MFs completely depend on the portfolio managers. But, the
portfolio managers proved to be unreliable and the corrupt placement business
destroyed the sector while the profits went into the companies' pockets. Furthermore,
whether the money was invested in the market or not is totally unknown.
The issue of Bangladesh Fund: Previously the government had decided to form an
exclusive mutual fund to conduct key trading in the market. In this regard, an open-
ended mutual fund titled 'Bangladesh Fund' was formed under the sponsorship of the
Investment Corporation of Bangladesh (ICB) and seven other state-owned banks. This
fund formally started its operation on May 05, 2011. Its target was to divest shares
worth Tk 50 billion (5,000 crore).
But there arose a question as to how transparently and efficiently the mutual fund would
be managed, when the existing fund management was not that encouraging,
particularly, when most of the shares were overvalued. In Graph-3 we see how
irrationally the graph of the Dhaka Stock Exchange transactions moved in a month in
2011 after announcement of the Bangladesh Fund package. So, the fund could not help
stabilise the market, rather it created an artificial demand in the market.
Finally, if you are a less risk-taker and long-term investor, you can consider investing in
MFs. Skilled managers are supposed to be involved in mutual fund management and
they are supposed to run the MFs based on extensive research work to minimise
investors' risks by investing their money in different shares.
To conclude, the main reason of the MF market lagging behind is that most of the funds
are close-ended. That means the MF shares mature in a specific period of time. Buying
and selling of open-ended MFs are different from those of close-ended MFs. The number
of open-ended MFs in the market is very small. There should be more open-ended MFs
alongside the close-ended ones. More MFs in the market can reduce the capital market's
too much dependence on the banking sector.

The mutual fund sector registered a gain of 8.73 percent last year against
5.19 percent by DSEX, the benchmark index of the Dhaka Stock Exchange,
on the back of good performance of asset managers.
We could have generated more gain if the market remained stable, said
Yawer Sayeed, managing director of AIMS of Bangladesh, a pioneer in
private sector mutual fund operations.
All asset managers in the industry had outperformed the market gauge in
terms of return on investment, LankaBangla Securities said in its yearly
analysis.
The sector is trading below its asset value, which is attractive for investors,
it added.
The biggest gainer last year was the Fourth ICB Mutual Fund, which rose by
37.69 percent, while the ICB Islamic Mutual Fund was the worst loser,
plunging by 2.3 percent.
Among the 39 mutual funds, only six are trading at a premium and all other
funds at a discount, LankaBangla said.
The industry's current price to net asset value (NAV) ratio stands at 0.76,
which means the close-ended mutual funds are trading on discount, it said.
The NAV of a mutual fund shows its ability to give dividends to unit
holders. When the NAV of a fund rises beyond its face value, it is more able
to give dividends.
Based on the latest NAV, the market capitalisation of the mutual fund
sector stands at Tk 3,630 crore.
A mutual fund is a professionally managed collective investment scheme
that pools money from many investors to invest in stocks, bonds and short-
term money market instruments.
The top assent manager in terms of asset under management is Race Asset
Management Company having 45 percent market share in the industry,
followed by LR Global Bangladesh Asset Management Company and AIMS
of Bangladesh.