Role of mutual funds in building portfolios

January 22, 2021 10:13:20

| Updated:

January 22, 2021 14:02:04

Financial security during old-age affects almost everyone. Bangladeshis, who can afford, tend to acquire property. While this strategy may increase wealth, especially in view of rising prices, the income stream may either not be regular, or adequate.

Moreover, repair and maintenance costs and property taxes drain cash. The security aspect may be an additional headache. That is why, experts say, financial assets should occupy the major chunk of one’s retirement savings.

This is where mutual funds (MFs) come in. They pool funds from thousands of investors, mostly retail. The accumulated money is invested in a basket of companies and/or instruments to spread the risk.

They are liquid and some of them provide more income than fixed deposits.

Techniques used by mutual fund companies are diversification, asset allocation, and periodic balancing. Moreover, financial analysts and portfolio managers keep a hawk eye on the market and protect the interest of investors while at the same time grow fund assets. Closed-end funds have the possibility of capital gains.  

AIMS of Bangladesh, the first asset management company in Bangladesh, has been manufacturing and selling mutual funds since 2000. At present there are four mutual funds under their umbrella. The company is thinking of bringing more mutual funds to market soon. In this connection, this author interviewed Yawer Sayeed, the managing director of the company. An edited version of their conversation follows.

Question: Your company is working on introducing new mutual funds shortly. Could you please explain why this is a good time?

Answer: The sector, since its inception about twenty years back, did not pick up and gain the hoped-for popularity. It is therefore incumbent on us (AIMS) to lend a hand in resurrecting this sector aligning with the efforts of the regulator.

Q: Will you achieve economies of scale?

A: That is the expectation but only time will tell.

Q: Will the new fund adopt new investment strategies and/or targets?

A: Our new venture, in a decade, aptly named AIMS Resurrection Series MF, will be a trust in perpetuity. This family will comprise various funds differing by nature, characteristics, scope, size, and tenor. They may be either open-ended or closed-ended or hybrid.

Q: Is there no room to issue fresh securities in your existing suite of mutual funds?

A: No, since till now we only managed close-end mutual funds with fixed capital and tenor.

Q: What has been the horizon return on your mutual funds over, say, five or 10 years?

A: We have been averaging about 10 per cent-15 per cent (per annum) so far but with the 6.0 per cent-9.0 per cent interest rate regime we would be satisfied with 7.0 per cent-10 per cent (per annum) range.

Q: Do you participate in the over-the-counter (OTC) market?

A: We usually do not because such stocks are categorised as junks.

Q: Are non-resident Bangladeshis (NRBs) allowed to invest in the new offering?

A: Sure, all our funds are open for NRBs.

Q: What is the profile of the typical investor of mutual funds?

B: Members of the retired middle class comprise the majority of individual investors. However, large portfolio investors also play an influencing role under the auspices of merchant banks.

Q: Are institutional investors allowed to subscribe to mutual funds?

A: Yes, they are allowed. Merchant banks and pension/provident funds are in the forefront usually.

Q: Has corporate governance improved over time?

A: It certainly has but there is room for improvement. It is a continuous process.

Q: What measures are there for consumer protection?

A:  The relevant rules are quite adequate while there is some need of updating here and there. But the (moot) question lies in the uniform application of the rules.

Q: What is your opinion about the free float of our listed companies?

A: There are rules concerning minimum holding of individual directors (2.0 per cent), and of the directors collectively (30 per cent) of the issued shares. Rules on minimum public offer also exist. It is fine as long as monitoring is there after public float to ensure these parameters are constantly maintained.

Q: As an institutional investor what role do you play at annual general meetings?

A: We limit ourselves to posing questions seeking clarifications only when anomalies in reports and accounts are detected.

Raihan Amin is an ex-banker.

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