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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