The Investment Corporation of Bangladesh (ICB), the trustee of the highest number of mutual funds in the country, has urged the government and the capital market regulator to allow relaxations in maintaining provisions against unrealised losses for the mutual funds.
ICB, the trustee of 62 mutual funds, has proposed that at least 25% of the profit earned by mutual funds in the current fiscal year be kept as provisioning, while the remaining 75% be distributed as dividends among the unit holders for the interest of investors who have poured money into the funds.
In a recent meeting on 22 May with senior government officials at the Ministry of Finance, the ICB sought the relaxation in line with capital market development.
Earlier, on 17 May, ICB Managing Director Niranjan Chandra Debnath made the same appeal in a meeting with the Bangladesh Securities and Exchange Commission (BSEC) and capital market stakeholders.
While asked about the proposals, Debnath told TBS, “Mutual funds are formed with investors’ money. However, in recent years, many funds couldn’t distribute dividends because they had to keep provisions for portfolio erosion or unrealised losses due to the capital market downfall.
“Other costs managing the funds remained as usual, but only the investors have been deprived of dividends.”
He added, “Given the current state of the capital market, we have proposed a relaxation in provisioning to the government as well as the BSEC so that investors can at least receive some dividends. If such relaxation is granted, they will get at least a portion of the returns.”
He further said, “As per regulations, keeping provisions against unrealised losses is mandatory, as the industry is now in trouble due to stock market downfall, so considering the present market condition, there is a need for relaxation.”
Struggles of mutual funds
As per ICB data, out of 62 mutual funds, 52 incurred losses in 2024. Of the funds, some have maintained fiscal year and some calendar year.
Regarding the causes, insiders attributed some causes like floor price imposition, and a bearish capital market due to political instability last year for national elections and student-led mass uprising.
As a result, 49 mutual funds failed to declare any dividends to their unit holders, the data showed.
Among them, despite the losses, nine mutual funds paid dividends to their unit holders.
Only six have maintained a positive portfolio and 56 witnessed erosion in their portfolio that led to a significant amount of unrealised losses for them.
Against losses, the mutual funds had to keep provisions.
Fear of liquidity crunch as unit surrender increases
Officials at the trustee department of the ICB said due to the lack of dividends in recent years and the ongoing bearish trend in the capital market, a crisis of confidence has emerged among unit holders of mutual funds.
As a result, there is a growing tendency to surrender units and withdraw capital. If this crisis of confidence and the trend of capital withdrawal by surrendering units continue, it could lead to a liquidity shortage in the market, they said.
The officials also said that due to the declining state of the capital market, most fund managers have experienced significant portfolio erosion. As a result, if the funds are required to maintain 100% provisioning, the majority of closed-end funds will not be able to pay dividends even in 2025, they pointed out.
This may further increase the tendency among unit holders to surrender their units, posing a serious threat to the stability of the capital market, they added.
Md Shariqul Anam, deputy general manager at the Trustee Division of the ICB, told TBS, “In recent times, the redemption rate of mutual funds has increased alarmingly, reflecting a clear crisis of investor confidence in the mutual fund industry and posing a threat to its stability.”
He continued, “Compared to the rising returns from other traditional investment instruments such as bonds and fixed deposits (FDs), mutual funds’ inability to provide minimum dividends is discouraging investors. As a result, many are inclined to withdraw their investments.
“If mutual funds are unable to distribute dividends for the financial year ending on 30 June 2025, a significant number of individual and institutional investors have verbally indicated their intention to withdraw from closed-end mutual funds. Such a mass withdrawal could intensify the liquidity crisis in the capital market, adversely affecting both market stability and investor confidence.
Given the current situation, coordinated efforts from all relevant stakeholders are urgently needed to ensure the stability of the mutual fund industry and to restore investor trust.”
Provisioning rules
Section 67 of the “Securities and Exchange Commission (Mutual Fund) Rules, 2001” formulated by the BSEC states, “Before declaring any scheme’s dividend, each mutual fund shall, to the satisfaction of its auditor, make provisions for losses arising from the decline in market value below the purchase price of investments, and the method of determining such provisions shall be disclosed in the notes to the accounts.”
In line with this provision, asset managers have historically maintained the necessary amount of provisioning for market value erosion based on market conditions and auditors’ opinions.
However, since 2023, based on verbal instructions from the BSEC to maintain 100% provisioning against market value erosion has become mandatory for all mutual funds. Asset managers say they have been complying with this directive accordingly.