Basics of Mutual Fund

Mutual Fund is one of the oldest and most widely used investment vehicles in the world. Conceptualized almost 300 years ago, the Mutual Fund structure has not only survived the test of time and the many ups-and downs of the world financial markets, but it has also flourished. Today the global Mutual Fund industry is gigantic, comprising of more than 80,000 individual funds with over US$26 trillion in assets under management. In terms of reach, over 300 million retail investors across a hundred countries invest in capital markets through Mutual Funds. In recent years, the Mutual Fund industry in Bangladesh has grown very rapidly. As of August 2009, 19 mutual funds were listed on the DSE that accounts for 5.8 percent of the total market capitalization. The Mutual fund growth in terms of turnover trebled in the third quarter of 2009. The Bangladeshi Mutual Fund industry stands at an estimated value of 10,500 crore BDT, of which almost 5,500 crore is close-ended Mutual Fund. With this staggering figure and more Mutual funds waiting to enter the capital market, Mutual Fund is undoubtedly the most promising sector in our capital market.

Three main reasons why this industry has been so successful are:

•  Through the pooling of assets, Mutual Funds offer you access to professional management at a minimal cost

•  Mutual Funds help small investors reduce their investment risks through diversification

•  Due to strict regulatory oversight and separation of the investment, custodial and oversight functions, Mutual Funds offer one of the most transparent and safe investment vehicles

Advantages of investing in Mutual Funds

Generally investment in mutual funds enjoys some advantages over investment made directly in other securities of the capital market. Investors of this mutual fund will be able to enjoy the following advantages.

•  Professional Management — Alif Assets Management Ltd's research will help in selecting, and monitoring the performance of the securities the fund purchases. As the Fund will be professionally managed by us, investors will be relieved from the emotional stress associated with day-to-day management of individual investment portfolio.

•  Diversification — Spreading your investments across securities in a wide range of companies and industry sectors can help lower your risk, in case of a company or sector fails. The diversified portfolio will allow investors gain a broad exposure to the overall stock market which may not be possible at the individual level.

•  Affordability — Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low amounts for initial purchases, subsequent monthly purchases, or both.

•  Liquidity — Mutual fund investors can readily redeem their shares at the current NAV — plus any fees and charges assessed on redemption — at any time.

•  Tax Benefits - Income will be tax free up to certain level, which is permitted as per Finance Act. Investment in the Fund would qualify for investment tax credit under section 44(2) of the Income Tax Ordinance 1984.

•  Low Costs - Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

•  Transparency - The investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

•  Industry performance - In Bangladesh, the mutual funds enjoy a 10% (ten percent) reserved quota in all Initial Public Offerings (IPOs). Given the lack of supply of high-quality scripts in the Bangladeshi stock market, IPOs have historically outperformed the general Bangladeshi market index significantly and, therefore, have been a major source of outperformance for the mutual fund industry in Bangladesh.

Key Players for launching a Mutual Fund

Sponsor

The sponsor of the fund provides the primary capital for launching the fund. As a result, the sponsor sets the policies and guidelines of the Mutual fund. The constitution of the mutual fund is set on a trust deed and it is executed by the sponsor in favor of the trustee of the fund (usually named in the trust deed). Sponsors of the fund can invest at least 10% or more. The number of sponsors in any fund can be more than one .

Trustee

The trustee is considered to be the guardian of the fund and ensures compliance of SEC and other rules and oversees the implementation of the trust deed . The Trustee also safeguards the properties of the fund for all its stake holders.

Asset Manager

The asset management company makes the day-to-day investment decisions for the Mutual Fund and is responsible for the performance of the fund.

The asset manager also ensures that no investment activity is done contrary to the provisions delineated in the policies, guidelines and the trust deed. The function of the asset manager also includes:
•  Activities relating to regulatory protection and reporting,
•  Preparation and distribution of prospectus, annual and periodic report of the Mutual Fund and other papers for the investors,
•  Accounting activities and preparation of tax return and
•  Insurance and other services

Custodian

Custodians are financial institutions that keep the securities of the mutual fund in safe custody. It also retains the following documentation for the clients:
•  Statement of receipt and distribution of Securities & money;
•  Detailed statement relating to the right of the clients on the Securities possessed on behalf of the clients;
•  Detailed statement of registration of securities;
•  Ledger of Accounts for each Client and
•  Detailed statement of order received & given from the clients