Tenure extension to dent investor confidence: experts

Experts have opposed the government's plan to extend the tenure of closed-end mutual funds by 10 years as the move may erode investors' confidence in the stock market.

Closed-end mutual funds are investment funds that gather a fixed amount of money normally for a decade from a number of investors and re-invest them into stocks, bonds and other assets.

The finance ministry has recently instructed Bangladesh Securities and Exchange Commission (BSEC) to rethink about extending the time for the funds that are going to be liquidated in the coming years.

Stockmarket analysts said the move will lower the investors' confidence on mutual funds further at a time when 33 out 37 mutual funds are being traded below face value.

The existing discount rate—the price of a unit compared to its net asset value—of 37.9 percent for the closed-end mutual fund sector has also failed to bring in new investors, experts said.

“The extension will deepen the confidence crisis among investors. So, the extension should not be given,” said Mostaque Ahmed Sadeque, president of the DSE Brokers' Association.

He said fund managers are calling for the extension only to receive annual fee, but the regulator should think about the general investors.

Abu Ahmed, a stock market analyst, said unsuccessful asset managers are lobbying with the government to have the tenure extended.

The extension, if approved, will affect the investors as well as the mutual fund sector, he said.

Ahmed, also a former chairman of the economics department of Dhaka University, said the regulator should think about the investors, not the bad performers.

Sadeque said he bought mutual fund units with the hope of getting the money back along with profits after a certain period.

“Why will I have to wait for another 10 years?”

Proponents of the extension say if the funds are liquidated, the market may fall because of selling pressure.

Market analysts have come up with proposals against the extension demand.

One of the proposals, Ahmed said, is to allow floatation of new mutual funds, which will create demand and thus minimise the impact of the selling pressure of the old funds. In another suggestion, he said all the funds would not mature for liquidation within one or two months, so the market will have the time to absorb the selling pressure.

“Was the market badly affected when funds in the past were closed? In fact, the market was normal. Moreover, investors reinvested the proceeds into the stock market.”

Some analysts also recommended the regulator give approval to convert the closed-end mutual funds to open-ended mutual funds so that investors can get their money back if they want.

Yawer Sayeed, managing director of AIMS of Bangladesh, an asset management company, said asset managers set a tenure when they initiate a fund and investors put in their money after looking at the term.

“So, the regulator should not interfere in the tenure issue,” he said. 

In June 2015, the regulator set the 10-year tenure for conversion or liquidation of closed-end mutual funds.

Later, a writ petition was filed with the High Court challenging the BSEC's directive.

The Appellate Division of the Supreme Court upheld the BSEC directive for the sake of general investors.

Of the 27 mutual funds that were traded at Dhaka Stock Exchange yesterday, 6 rose, 15 declined and 6 remained unchanged.