Investors bet on overpriced mutual funds
Driven by rumours, investors rushed to the mutual funds that were trading well above their asset value in the last few weeks, risking money at a time when the overall market is not bullish owing to the pandemic.
Mutual funds pool money from investors and channel it into securities such as stocks and bonds. Once profits are logged, the fund manager disburses it among the unit-holders.
Among the 37 listed mutual funds, the unit price of 20 was more than their net asset value, said IDLC Asset Management Company in an analysis on the sector.
Generally, investors buy the units of mutual funds looking at the discount on the net asset value (NAV). The NAV is a company's total assets minus its total liabilities.
"It is not clear to me why people invested in the units whose prices are higher than their asset value. No rational people would buy such over-priced units," said an analyst of an asset management company, which manages several mutual funds.
The unit price of most of the funds doubled in the last few weeks. The unit price of CAPM IBBL Mutual Fund was 252 per cent of its NAV.
Prime Finance First Mutual Fund's unit price rose to 249 per cent of its net asset value, the IDLC analysis showed.
"There was nothing for the funds to make such a jump suddenly. There is a rumour that gamblers are taking a stake in the sector as it would grow," said a merchant banker.
Stock investors poured money in the sector following the rumour, said Hannan Sarkar, a stock investor.
Now, the investors either will have to sell the units at a loss or wait for the gambling to start again, he said.
Although a difficult one, there is an alternative: if the fund manager can raise their asset from the current level, general investors would have a hope to get back their money, Sarkar said.
The appetite for the mutual funds was largely limited to the closed-end funds that are traded on the bourse. The demand for the open-ended ones, which are not traded, has almost been the same.
The performance of the closed-end funds was lower than that of the open-ended fund in recent times.
Year-to-date return of the DSEX, the benchmark index of the Dhaka Stock Exchange, was 11 per cent on November 16 whereas the return on aggregated closed-end mutual funds was 8.5 per cent.
For the open-ended funds, the return was 12.4 per cent, data from IDLC Asset Management showed.
"The closed-end funds were at the top of the demand only because of the rumour. There was no big jump in the stock market, so the funds have no potential to make a major stride during the pandemic," said another merchant banker.
He said almost all the mutual funds traded below their NAV in the last few years and none looked at them although they were lucrative at the time.
Some mutual funds have potential, and their price is lower than their asset value, but the investors were rushing towards some specific funds.
The units of CAPM IBBL Islami Mutual Fund rose around 150 per cent to Tk 16 in the last two weeks. SEML IBBL Shariah Fund doubled to Tk 14.50, DSE data showed.
The sponsors of some mutual funds have started to sell their stake seeing higher profits.
Eastern Bank, one of the sponsors of EBL First Mutual Fund, expressed its intention to sell 8.95 lakh units out of its total holding of 28.95 lakh at a prevailing market price.
Padma Bank Securities, one of the corporate sponsors of SEML FBSL Growth Fund, disclosed that it would sell its 15 lakh units of the fund.
Before the rise of the units of the mutual fund sector, the gamblers had spread rumours about the insurance sector, pulling general investors. Both sectors have started to fall, and general investors are not selling the funds at a loss, said Khairul Bashar Abu Taher Mohammed, CEO of MTB Capital.
"It ultimately reduced their purchasing power of the investors, thus the turnover of the market," he said.
The units of 29 mutual funds are still trading below their face value, DSE data showed. As the funds' net asset value is lower than their face value, their price is also lower, according to analysts.
The mutual fund sector has been struggling because of the weak performance of the fund managers, they said.
The Bangladesh Securities and Exchange Commission (BSEC) has formed a committee as some mutual funds were rising abnormally.
"The BSEC will look into the trades of the funds. If any irregularities are found, we will take actions," said BSEC Spokesperson Rezaul Karim.