Institutionalising Bangladesh's capital market through retailisation

Illustration: TBS

The global financial ecosystem has long embraced mutual funds (MFs) as a means to cater to the diverse financial goals of individual investors. Globally, MFs are a cornerstone of household financial assets. 

In USA, over 52.3% of households (with 68.7 million US households) own mutual funds, offering a mix of equity, debt, and hybrid funds that cater to varying financial goals including retirement plans. It is an integral part of individual savings and pension plans in other developed economies like Canada, and the UK. 

Even in India, through small and regular investments in Systematic Investment Plans (SIP), mutual funds are an immensely popular investment vehicle for retail investors.

While other financial markets have introduced mutual funds as a vehicle for risk-adjusted returns, diversification and efficient tax management through professional fund managers, Bangladesh's retail investors have traditionally relied on savings instruments like Sanchay-Patra, bank deposits and the stock market. 

While some of these options may meet investors' early goals, they don't address the varied financial needs that arise over time. Since its emergence in the 1980s, Bangladesh's mutual fund industry has mostly focused on institutions, offering little to attract individual investors.

The evolution of Bangladesh's mutual fund industry

The mutual fund industry in Bangladesh traces its roots back to 1980 with the launch of the "First ICB Fund," a closed-end mutual fund introduced by the state-owned Investment Corporation of Bangladesh (ICB). Later, ICB launched the country's first open-end fund, "ICB Unit Fund" in 1981. Until the late '90s, ICB was the sole asset manager to serve the diverse investment needs of investors.

The private sector entered the mutual fund industry in 1999, with AIMS Of Bangladesh introducing the first mutual fund in the private sector, "AIMS First Guaranteed Mutual Fund', a closed-end mutual fund. This marked the beginning of a competitive landscape, with private players launching various mutual fund products, including Shariah-compliant funds, growth funds and balanced funds. 

The next decade saw further diversification as Prime Finance Asset Management Company Limited launched the first open-end fund in the private sector in 2010.

Despite these developments, mutual funds remained underpenetrated in Bangladesh's capital market, characterised by low financial literacy, operational inefficiencies and limited product awareness among retail investors. 

Bangladesh's stock market is retail centric and retail investors often gravitated towards speculative trading, contributing to volatility in the capital market rather than pursuing long-term wealth creation strategies. 

To overcome these challenges, mutual funds needed to become more accessible and better aligned with investors' long-term financial goals at different life stages. This required efforts to make mutual funds more retail-friendly and tailored to a wider range of investors.

Since 2017, several groundbreaking initiatives have reshaped the industry, focusing on making investments more accessible to a wider audience and encouraging disciplined investment habits among retail investors.

IDLC Asset Management took a leadership role in driving these changes, introducing innovations such as digital portal for investor services, Systematic Investment Plan (SIP) and the country's first debt mutual fund. Recognising the growing needs of the retail investors, other asset managers have also launched similar investor-centric products and services over the last couple of years. 

By launching a digital platform, Asset Managers have improved investment accessibility for retail investors by removing the traditional barriers like paperwork and cumbersome manual processes through allowing online buying, selling and service requests. 

Moreover, SIP was introduced in 2018, which has democratised the access to the capital market, enabling more people to participate in long-term wealth accumulation without needing significant upfront capital or financial expertise. 

SIP helps to reduce investment risk by spreading contributions over time, mitigating the impact of the market fluctuations. This "Taka-cost averaging" approach allows investors to avoid the risks associated with lump-sum investments. For instance, SIP enables retail investors to encourage a culture of disciplined saving and offers a simple, low-barrier way to enter the market and build wealth consistently, without requiring deep market knowledge or constant monitoring.

Since 2017, several groundbreaking initiatives have reshaped the industry, focusing on making investments more accessible to a wider audience and encouraging disciplined investment habits among retail investors. IDLC Asset Management took a leadership role in driving these changes, introducing innovations such as digital portal for investor services, Systematic Investment Plan (SIP) and the country's first debt mutual fund.

As a spearhead in innovative productisation, in June 2021, the country's first debt mutual fund, IDLC Income Fund, was introduced which was a watershed milestone for capital market development in Bangladesh. In particular, debt mutual funds can give access to high-denomination government securities like treasury bills and bond and corporate bonds, offering better returns than fixed deposits even with smaller investments and flexibility of the investment holding period. 

Recognising the gap between traditional savings instruments and the need for diversified investment options for the retail segment, the debt mutual funds not only facilitate diversification beyond equity-focused products, ensuring stable returns but also offer enhanced limits (up to Tk5 lakh) to avail tax rebate facilities compared to traditional deposit products.

Today, with 127 active mutual funds and combined Assets Under Management (AUM) of approximately Tk150 billion, leading asset managers are actively promoting a culture of informed investing by continually introducing investor-centric products and leveraging technology and thus not only shaping the future of mutual funds but also fostering a more robust and inclusive capital market. 

The path towards sustainable capital market

As more retail investors participate in mutual funds, the equity market will become more stable, and with other asset classes like debt funds, the capital market will expand with reduced volatility. Diverse asset classes like debt funds can stimulate the development of a liquid and efficient bond market offering investors a safer investment option. This provides additional avenues for investors to meet their financial needs. 

To fully realise the potential of mutual funds in Bangladesh, several structural and regulatory reforms are also needed.

Level playing field for tax treatment

Currently investors enjoy higher amounts of tax rebate facilities and lower tax rate against capital gain for listed securities compared to open-end mutual funds. For channeling the retail segments to the capital market through mutual funds, the tax treatment should be at least equal or better for individuals who opt for investing in open-end mutual funds. 

Moreover, to promote long term investment, the tax rate should be lower from the dividend income than the capital gain; a tax-free limit against dividend income from mutual funds up to a certain threshold will also be a good incentive for individual investors as well.

Digitisation of the operational process

Simplifying investment and liquidation processes can reduce barriers to entry and improve investor experience. The operational process of open-end mutual funds still depends on significant manual involvement and requires automation. Investors require interaction with brokers, Asset Management Companies (AMCs) and need physical signatures for transferring units through Central Depository Bangladesh Limited (CDBL) which is very cumbersome. 

Centralised e-KYC system and Document Reserve System(DRS) for all the market intermediaries, acceptance of digital signatures for unit transfer and minimising the intermediaries are crucial in this digitalisation process and seamless journey of the investors.

Expanding distribution networks and third-party collaborations

Along with other capital market intermediaries, banks and financial institutions, by enabling Mobile Financial Services (MFS), telecom operators, post offices, financial advisors, technology platforms and other third-party distributors as the selling agents to facilitate investment in mutual funds, will increase financial inclusion and enhance market depth. 

These expanded distribution channels can play a key role in marketing and distributing mutual fund products, ensuring they are accessible to a broader segment of the population and can help increase the reach of mutual funds across Bangladesh.

Supporting AMCs to tap retail segment

By allowing advertising and marketing efforts within funds' allowable expense ratio, AMCs will be encouraged to reach wider markets where retail footfalls are available.

Ensuring compliance in fund management along with flexible investment mandate

Strong governance and transparency in fund management, with greater flexibility in investment mandate and dividend distribution policy based on types of funds, higher allocation for mutual funds in initial public offerings (IPO), shares based on fund size will build investor trust and encourage broader participation.

Institutionalising Bangladesh's capital market through mutual fund retailisation offers immense potential for sustainable growth. By fostering financial inclusion, promoting diverse asset classes, and enabling regulatory and technological advancements, addressing operational, technical, and regulatory hurdles, the mutual fund industry can empower retail investors. This shift promises a more stable, efficient, and inclusive financial ecosystem, paving the way for long-term economic development.

Kazi Mashook ul Haq. Sketch: TBS

Kazi Mashook Ul Haq is the managing director of IDCL Asset Management Limited. He is an experienced professional with a demonstrated history of working in the capital market with expertise in business process automation, transformation and expansion, strategic planning, issue management, retail sales, customer service, finance and compliance.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.