Hard time for mutual funds

Half of the mutual funds are trading below their face value, showing that the sector is going through hard times.
Many mutual fund units will fail to announce dividends for the unit holders, as the net asset value (NAV) of the units dropped below their face values.
On the last trading day, 22 mutual funds, out of 41, traded below their face value, while the NAV of a third of the total listed mutual funds dropped below their face value.
The NAV of a mutual fund shows its ability to give dividends to the unit holders. When the NAV of a fund rises beyond its face value, it is more able to give dividends.
A mutual fund is a professionally managed collective investment scheme that pools money from many investors and invests it in stocks, bonds and short-term money market instruments.
A prolonged downtrend in share prices since the market debacle in January-February last year is mainly responsible for the hard times.
DGEN, the benchmark index of the Dhaka Stock Exchange, went down by 48 percent or 4,020 points to 4,284 on July 26 this year from 8,304 points on January 2 last year.
It is obvious that the NAV of mutual funds will drop if share prices fall, asset managers said.
“The present trend is not good. Many asset managers would not declare dividends for the mutual funds they are operating now,” said Yawer Sayeed, managing director of AIMS of Bangladesh, a pioneer in private sector mutual fund operations.
The future of mutual funds depends on how much dividends the asset managers will declare next month, he said.
“If a major portion of the funds cannot declare dividends, the retail investors would backtrack on investing in the sector, leaving a big negative impact on the sector,” he said.
Another asset manager said the role of the regulator is a major reason behind the current setback in the mutual fund sector. “When the market was bullish, the regulator allowed excess mutual funds to operate in the market,” he said.
The Securities and Exchange Commission also permitted the purchase of other mutual funds, the asset manager added. “It was a wrong regulatory decision.” If one mutual fund invests in another, it would not create a supply of funds or liquidity in the equity market, he said.
Presently, the 41 mutual funds account for 1.85 percent of total market capitalisation.