Mutual Funds - Welcome to ICMAB · the performance of mutual funds. It is found that by investing...

S. M. Kalbin SalemaLecturerBangladesh Institute of Capital [email protected]

Sagira Sultana ProvatyLecturer

Bangladesh Institute of Capital [email protected]

Md. Habibullah ACCAAssistant Professor

Bangladesh Institute of Capital [email protected]

4 THE COST AND MANAGEMENTISSN 1817-5090, VOLUME-48, NUMBER-01, JANUARY-FEBRUARY 2020

Tasruma Sharmeen ChowdhuryAssistant ProfessorBangladesh Institute of Capital [email protected]

Abstract

The present study provides a comprehensive analysis of the mutual funds industry by analyzing the monthly data of price and NAV from January 2017 to December 2018 collected from the websites of Dhaka Stock Exchange (DSE) and analyzing the investors’ perception regarding the performance of the mutual fund industry collected through a survey questionnaire from May, 2019 to June, 2019. Analyzing primary data gives some indications such as diversification of the portfolio is the prime motif of investment in this industry which is not addressed yet properly by the asset management companies; investors are reluctant to reinvestment unit and prefer cash dividend over stock dividend; potential investors are hindered by lack of knowledge, reinvestment unit, disclosure, existing dividend policy, tenure uncertainty etc. which need to be addressed. The analysis is further extended to analyze the performance of mutual fund industry based on historical data using Sharpe ratio, Treynor ratio, Jensen’s alpha and R2; and this analysis shows that only one Assets Management Company has diversified portfolio which is an indication that this industry needs more pondering to attract potential investors.

Keywords: Mutual Fund, Investors’ Expectation, Performance Analysis and Asset Management Companies.

IntroductionMutual Fund is a sort of collective investment scheme (CIS) or a ‘pooled investment’. It is a platform where investors put their money in and a professional fund manager invests the collected fund in different kind of assets, such as bonds, stocks, short-term money market instruments, and other financial instruments. By means of mutual fund small savings from retail sector are collected. When an investor purchases a unit of mutual fund it represents his/her portion of the investment portfolio. Individual investors can have the opportunity to manage their fund by professional fund manager, by means of mutual fund, which would otherwise be expensive and most of the case out of reach for them. Mutual fund also allows to hold a widely-diversified portfolio.

Do Mutual Funds in Bangladesh Meet Investors’ Expectations?

MutualFundsMutualFundsin Bangladesh


MutualFundsMutualFundsin Bangladesh

Bangladesh Securities and Exchange and Commission (Mutual Fund) Rules-2001, Trust Act-1882 and Registration Act-1908 establish and govern the mutual funds in Bangladesh. Although, the history of mutual fund in Bangladesh is of more than 38 years the sector is still at a nascent stage and very small in size compared to the capital market. Since the beginning of the sector in 1980, there has only been close-ended fund in the country. Investment Corporation of Bangladesh (ICB) launched the first-ever mutual fund named ‘the first ICB mutual fund’ that created the history of mutual fund in the country. Since then, this sector has been growing very slowly. In 2010, for the first time, an open-end mutual fund was launched in the country (Chowdhury et. al., 2018).

There are 37 mutual funds currently trading in Dhaka Stock Exchange (DSE) by July 2019, out of which thirty-three are conventional and four are shariah based. Moreover, there are 46 open end mutual fund of which 38 are conventional and the rest are shariah based (Bangladesh Securities and Exchange Commission [BSEC], 2019). There are 39 Asset Management Companies (AMCs) working in Bangladesh as of February 2019 (BSEC, 2019). After analyzing the data of number of asset management companies (AMCs) and funds managed by each AMCs, it is found that only 24 are managing funds and the rest are sitting idle.

Mutual Funds (MF) are extremely popular globally due to various benefits including tax rebates, professional management, a secure trust-like structure that provides protection, and exposure to a higher return asset class such as equities. Investors might expect mutual funds a safe bet, considering how they are pooled from many people and are managed by professionals. Unfortunately, though these instruments have been among the poorest performers in the capital market over the last few years, breaking investor confidence and even bankrupting some. As of 27 June, 2019; there were fifteen mutual funds trading below their Net Asset Value (NAV). There were nine MFs whose NAVs were below their face values of Tk10 per unit. The industry’s current price to NAV ratio stands at 1.11.

Given the context, this paper intends to discover the investors’ expectation regarding mutual funds in Bangladesh as well as evaluate the performance of those funds. The contributions of this paper are as follows. First, this paper presents an analysis based on

primary data reflecting the expectations of present and potential mutual fund investors of Bangladesh. Second, it presents the performances of existing mutual funds based on historical data. Third, it links between the existing performance of the mutual funds and the expectations of the investors of the mutual funds of Bangladesh. Thus, the rest of the paper has been organised as follows. After this brief foreword, a comprehensive literature review is presented in Section 2. Objective of the study is given in Section 3. Section 4 describes the methodology of the study. Section 5 explains primary data analysis of the study and performance evaluation of Mutual Fund based on historical data in presented in Section 6. Concluding remarks have been presented in Section 7.

Literature ReviewA number of researches have been performed to study the performance of mutual funds. It is found that by investing in mutual funds investors can diversify their risk (Cumby and Glen, 1990). The study of Chen and Jang (1994) examined performance of 15 US-based international mutual funds and observed that mutual funds are doing better in the domestic market than in the international market. In an alike research, Kao et. al. (2005) found that international mutual fund managers are poor in making investment decisions based on economic and other factors affecting the direction of the market. Whereas, using Chines market setup, Kiymaz (2015) tested the performance of mutual funds by using different risk-adjusted measures, for instance, Jensen’s α; Sharpe ratio; Treynor ratio, and found that these funds outstripped market portfolio.

Evaluation of the performance of investment portfolios was pioneered by Treynor (1965), Sharpe (1966), and Jensen (1968). The statistical techniques developed by them are the most commonly used portfolio performance measures even now. Treynor (1965) proposed a way of assessing the performance of a portfolio by adjusting the mean excess return for the degree of undiversifiable risk to calculate the performance of the portfolio. Market risk could be calculated by regressing the returns of mutual fund on the returns to a market benchmark index. Sharpe (1966) calculated mean excess return and adjusted for the degree of total risk of the portfolio. Total risk was measured by the standard deviation of returns. Jensen (1968) formulated a method of determining whether


the excess return could be attributed to superior management, or purely to chance.

The methods used in these earlier studies were further polished by Kon and Jen (1979), Henrikkson and Merton (1981), and Chang and Lewellen (1984). Kon and Jen (1979) developed a methodology to evaluate timing, selectivity, and market efficiency of mutual funds. Henrikkson and Merton (1981) established statistical procedures to estimate forecasting skills of managers. The study by Chang and Lewellen (1984) focused on the issue of market timing and the investment performance of mutual funds.

The study of Noulas et. al. (2005) assesses the performance of Greek equity funds based on the analysis of risk and return using the data of 1997 to 2000. They measured the risk through the coefficient of variation and the systematic risk. The results specified positive relation between risk and return for the study period and the betas for all funds are smaller than one. The paper of Arugaslan et. al. (2007) aims to evaluate the risk-adjusted performance of US-based international equity funds using risk-adjusted returns of 50 large US-based international equity funds for the period of 1994 to 2003. The empirical results demonstration that the funds with the highest mean returns may lose their appeal to investors if the level of embedded risk of the fund were factored into the analysis. The evidence found in this study can be useful in decision making by investors interested to who participate in the global stock market via international equity funds.

The paper of Aggarwal and Gupta (2007) reveals that returns earned by Mutual funds were actually due to the exposure of some factors only and fund managers did not add any value. Using CAPM and FAMA French model they found that the value addition of the mutual funds depends on some factors such as excess market returns, size factor, and value factor.

Yadav and Yadav (2012) conducted their study to compare between Mutual Funds and Foreign Institutional Investors. The study reveals that though in India, investments made by the mutual funds were greater than investment made by Foreign Institutional Investors. On another study by Vyas and Moonat (2012) exposes that careful and reasonable diversification of investment in mutual funds should be done to balance the risk involved in investment.

A similar study by Dhar et. al. (2017) tries to classify the factors that affect purchasing behavior

of individual investors in Dhaka city. They identified two underlying factors namely intrinsic features and income features of the funds using exploratory factor analysis technique based on a sample of 103 respondents. Respondents were selected using simple random sampling technique. However, intrinsic features include reputation of the fund manager, diversification, investment simplicity, growth prospect of the fund, brand name, entry and exit load, risk of the scheme and asset quality; and income features include return performance and tax benefit of the investor.

On a similar note, Chowdhury et. al. (2018) attempted to assess the performance of 24 closed-end mutual funds traded in Dhaka Stock Exchange using the data from December 2011 to January 2017. The study incorporated market price as a basis for analyzing the risk-return profile of the funds for evaluating the performance of the funds in the market. Both Jensen’s α and M squared measure can independently describe whether a fund beat the market or not. The authors found that 21 funds outperformed the market.

None of the studies carried out to assess the link between the performance of the mutual funds and the expectations of the investors in Bangladesh. Our endeavor was to test the performance of funds in the light of investor’s expectations taking Bangladesh capital market as field of study.

Objective of the StudyBroad objective of the study is to understand the scenario of mutual fund industry of Bangladesh. However, specific objectives of the study are to understand the investor’s perception regarding the performance of the industry based on survey data and to assess the performance of the mutual fund industry based on secondary data.

MethodologyThis study adopts quantitative analysis methods using both primary data and secondary data. Primary data is collected from survey and secondary data is collected from the websites of BSEC and DSE. The questionnaire comprised a 4-point Likert scale (Likert, 1972), where 1 = strongly disagree, 2 = disagree, 3 = agree and 4 = strongly agree. The study was conducted on the mutual fund investors or potential investors of mutual fund in Dhaka city. The sample was chosen randomly depending on the availability


and willingness of the respondents during the study period of May 2019 to June 2019. Initially, questionnaires were sent to 143 respondents but for some of the respondents, certain questions were left blank. After omitting such questions, a sample of 115 useable responses was obtained.

This study aims to evaluate the performance of all Closed-end Mutual Funds that were being traded in Dhaka Stock Exchange from January 2017 to December 2018. For these two-year performance 32 close-end mutual funds were found. NAV has been used as a basis of computing Sharpe ratio, Treynor ratio and Jensen’s α to assess the performance of asset manager. On the other hand, market price was used as a basis of valuation of the performance of mutual fund in the market.

Monthly market prices and NAVs (based on market price) were collected from DSE library and DSE news respectively. The returns of 91- days Treasury Bill have been collected from the website of Bangladesh Bank as a proxy of risk-free return and the annual returns were converted as monthly returns. The broad index of Dhaka Stock Exchange, DSEX index has been used as benchmark. Data of DSEX index were collected from DSE library.

Return:

For analyzing price-based performance, monthly returns of mutual funds were calculated using following formula:

Rt=

(Dt+ Pt- Pt - 1)

Pt - 1Where,

Rt = Return of mutual fund in period t

Pt = Market price of mutual fund in period t

Pt = Market price of mutual fund in the period t-1

Dt = Dividend paid by mutual fund in period t

These prices were adjusted for issuance of re-investment unit (RIU). Number of RIU per unit is calculated by following equation:

No.of RIU=No.of unit holding at record date×Face value×Declared RIU %

NAV per unit market price basis

Mean monthly returns of a mutual fund () was found by calculating arithmetic mean of 24 monthly returns.

Monthly market returns were calculated using the following formula:

Where,

Rt = Return in period t

Indext = Index in period t

Indext-1 = Index in period t-1

Risk:

The study used Standard deviation(σi), Coefficient of variation (CV) and Beta (β) (for measuring risk.

σi was used for measuring ‘Total risk’. It represents the dispersion of observations from the mean. Higher σi indicates higher risk.

CV was used for measuring relative risk. It represents risk per unit of return and lower CV means lower risk as well as consistent return of the fund.

Risk adjusted Performance:

Performance of individual mutual fund was assessed by Sharpe Ratio, Treynor performance measure and Jensen’s Alpha.


Sharpe ratio represents the risk premium earned per unit of total risk. It can be expressed as:

Si= σi

Ri- Rf

Sharpe ratio measures the performance on the basis of both rate of return and total risk. The fund with the higher Sharpe ratio has the better performance. But the Sharpe ratio of an individual fund by itself is not useful thus the Sharpe ratio for each fund must be computed for comparing these funds. Sharpe ratio with negative numerator provides incorrect ranking which is one of the limitations of Sharpe ratio.

Treynor performance measure considers market risk. It assumes portfolio of a mutual fund should be completely diversified. Treynor performance measure can be expressed as:

Ti= βi

Ri- Rf

Greater value of Treynor measure is preferable to investors. Treynor ratio does not work for negative numerators. It also requires positive beta to provide useful ranking.

Both Sharpe and Treynor ratios do not provide information on whether the mutual fund has outperformed the market portfolio. They do not provide any indication about the degree of superiority of a higher ratio mutual fund over a lower ratio mutual fund.

As both Sharpe ratio and Treynor ratio have some limitations, other measure has been used in this study for ranking purpose. Jensen’s alpha is based on market risk. Jensen’s Alpha represents the difference of actual mean return and the expected return of each mutual fund. It can be expressed as:

Jensen^' s alpha= α_i=R_i-[R_f+β_i (R_m-R_f )]

Positive value of Jensen’s alpha means, the mutual fund outperformed the market. On the other hand, negative value indicates underperformance in comparison with market.

Diversification:

R2 and σi / σM have been used to assess diversification achieved by the funds. The closer the R2 is to 1.00, the more completely diversified the portfolio is. If the ratio of total risk to standard deviation of market (σi / σM) is greater than beta, then the fund will not be completely diversified.

Survey Data Analysis of Mutual Fund IndustryOne of major contributions of the paper is accommodating the perception of existing and potential investors of mutual fund of Bangladesh. Each question has been presented in separate pie-chart to reflect the true scenario of the market.

Investment in Mutual Fund IndustryAs per the pie chart of the investments in mutual fund industry, it is revealed in the survey that 65% of the respondent have investments in mutual fund industry whereas 35% of the participant do not have any investments in mutual fund industry. It is imperative that this survey result will accelerate the growth of mutual fund industry in Bangladesh as lion’s portion of the participants have investment in mutual fund.

Do you have investments inmutual fund industry?

Yes No35%

65%


Reason(s) of Preference for Investing in Mutual FundsWith respect to the preference of investing in mutual funds other than any investment vehicle, 18% participant consider that consistent return is the main factor among other factors which lead them to invest in mutual funds other than any investment vehicle. Again 41% respondent think that diversification is the main reason for investing in mutual funds while same proportion (i.e. 41%) conceive that professional fund management is the staple reason for investing in mutual funds.

Respondent’s Satisfaction Regarding Assets Managers’ Disclosure of PortfolioAccording to the pie chart of the statement of “I am satisfied with asset managers’ disclosure of portfolio”, it is demonstrated that 48% respondent strongly agree and 9% respondent agree about the satisfaction with asset managers’ disclosure of portfolio. On the other hand, 8% respondent strongly disagree and 35% respondent disagree about the satisfaction with asset managers’ disclosure of portfolio.

Respondent’s Satisfaction Regarding Cash Dividend

As per the pie chart of the statement of “I am okay with cash dividend”, it is demonstrated that 48% participant strongly agree and 30% participant agree with their preference about cash dividend. On the other hand, none of the respondent strongly disagree with the statement and 22% participant disagree about the acceptance and satisfaction with cash dividend. It is crystal clear from the chart that majority of the participants strongly agree with the cash dividend.

Respondent’s Satisfaction Regarding Reinvestment Unit According to the pie chart of the statement of “I am okay with Reinvestment Unit”, it is showed that 19% participant strongly agree and 24% participant agree with their preference of reinvestment unit. On the other hand, 33% participant strongly disagree and 24% participant disagree about the acceptance and satisfaction with reinvestment unit. It is apparent from the chart that majority of the participants strongly disagree with the preference of reinvestment unit.

Why do you prefer investing inmutual funds other than any

investment vehicles?

Diversification

Professional fundmanagementConsistent return

41%

18%

41%

Strongly Disagree

Disagree

Agree

Strongly Agree

“I am satisfied with assetmanagers’ disclosure of

portfolio”

35%

8%

48%

9%

Strongly Disagree

Disagree

Agree

Strongly Agree

“I am okay with cash dividend”

30%

22%48%

0%

Strongly Disagree

Disagree

Agree

Strongly Agree

“I am okay with ReinvestmentUnit”

24%24%

19%33%


Respondent’s Satisfaction Regarding the Extension of Tenure of Mutual FundsAs per the pie chart of the statement of “I prefer the extension of tenure of mutual funds”, it is represented that 18% respondent strongly agree and 27% respondent agree with the preference of the extension of tenure of mutual funds. On the other hand, 18% respondent strongly disagree and 37% respondent disagree about the extension of tenure of mutual funds. It is transparent from the chart that majority

of the participants disagree with the preference of the extension of tenure of mutual funds.

Respondent’s Satisfaction Regarding the Performance of Mutual Funds According to the pie chart of the statement of “I am satisfied with my mutual fund investments’ performance”, it is demonstrated that 17% respondent strongly agree and 26% respondent agree about the contentment with mutual fund investments’ performance. On the other hand, 26% respondent strongly disagree and 31% respondent disagree about the satisfaction with mutual fund investments’ performance. It is obvious from the chart that majority of the participants disagree with the performance of mutual fund.

Limitation(s) hindering the investment in mutual fund As per the pie chart about the problem which limits from investing in mutual fund, it is revealed that majority of the participants i.e. 40% respondent have lack of knowledge which is the main obstacle for investing in mutual fund. Again, 12% respondent and 19% respondent think that reinvestment unit and tenure uncertainty respectively are the hindrances to invest in mutual fund. Moreover, dividend policy is considered as problem according to 18% respondent and disclosure is another limitation according to 11% participant.

Respondent’s Reliance on the Capacity of the Asset Management Companies (AMCs)According to the pie chart of the statement of “I don’t rely on the capacity of the asset management companies (AMCs)’ disclosure of portfolio”, it is demonstrated that 35% strongly agree and 29% agree with the statement. On the other hand, 14% strongly disagree and 22% disagree about the non-reliance on the capacity of the asset management companies (AMCs)’ disclosure of portfolio.

Strongly Disagree

Disagree

Agree

Strongly Agree

“I Prefer the extension of tenureof mutual funds”

18%

27% 37%

18%

Strongly Disagree

Disagree

Agree

Strongly Agree

" I am satisfied with my mutualfund investments' performance"

17% 26%

31%26%

Lack of Knowledge

Reinvestment Unit

Disclosure

Dividend policy

Which major problem is limiting youfrom investing in mutual fund?

Tunure Uncertainty

40%

19%

18%

11% 12%

"I don't rely on the capacity of theasset management companies(AMCs)"

Strongly Disagree

Disagree

Agree

Strongly Agree

14%

22%

29%

35%


Respondent’s Preference for Equity over Mutual Funds As per the pie chart about equity is performing better than mutual funds, it is represented that 27% strongly agree and 39% agree with the better performance of equity than mutual funds. On the other hand, 18% strongly disagree and 16% disagree that performance of equity is superior to mutual funds. It is evident that, majority portion agree with the superior performance of equity than mutual funds.

Respondent’s Inclination towards Investing in the Mutual Fund Industry in Near FutureAccording to the pie chart about planning to invest in the mutual fund industry in near future, it is demonstrated that 38% strongly agree and 23% agree to invest in the mutual fund industry in near future. On the other hand, 18% strongly disagree and 21% disagree to invest in the mutual fund industry in near future. It is evident that, majority portion reveal their positive response and agree to invest in the mutual fund industry in near future.

Mutual Fund Performance EvaluationThe authors have the opportunity to evaluate performance of 32 close-end mutual funds. Monthly data for the two-year period from January 2017 to December 2018 have been used.

Table-01: Ranking Based on Annualized Mean Return

Sl. Mutual Fund Annualized Mean Return, E(Ri ) Ranking Based on Return1 1JANATAMF -1.19% 24

2 1STPRIMFMF 2.73% 21

3 ABB1STMF 4.19% 20

4 AIBL1STIMF 9.15% 11

5 ATCSLGF 6.79% 16

6 CAPMBDBLMF -13.09% 32

7 DBH1STMF 8.47% 14

8 EBL1STMF 28.59% 1

9 EBLNRBMF -7.10% 29

10 EXIM1STMF -12.16% 31

11 FBFIF -5.25% 27

12 GRAMEENS2 8.87% 12

13 GREENDELMF 12.19% 5

14 ICB2NDNRB 15.94% 4

15 ICB3RDNRB 9.26% 10

16 ICBAMCL2ND 19.24% 2

17 ICBEPMF1S1 1.21% 23

"I think that equity is performingbetter than mutual funds"

Strongly Disagree

Disagree

Agree

Strongly Agree

27%18%

16%

39%

"I plan to invest in the mutual fundindustry in near future"

Strongly Disagree

Disagree

Agree

Strongly Agree

21%

18%

38%

23%


18 IFIC1STMF -5.78% 28

19 IFILISLMF1 11.26% 6

20 LRGLOBMF1 8.69% 13

21 MBL1STMF 7.50% 15

22 NCCBLMF1 4.71% 18

23 NLI1STMF 10.90% 8

24 PF1STMF 4.46% 19

25 PHPMF1 5.51% 17

26 POPULAR1MF 2.25% 22

27 PRIME1ICBA 19.10% 3

28 RELIANCE1 9.52% 9

29 SEBL1STMF 10.97% 7

30 SEMLLECMF -5.21% 26

31 TRUSTB1MF -8.12% 30

32 VAMLBDMF1 -4.54% 25

DSEX 4.24%

T Bill 2.61%Source: Authors calculations

From Table 1, we can see that, 19 funds out of 32, have beat the market in terms of annualized return. The best three return provider funds are: EBL1STMF, ICBAMCL2ND and RIME1ICBA. EBL1STMF provided 28.58% return.

Table-02: Value of CV and Ranking Based on Beta and R2

Sl. Mutual Fund Standard Deviation, (σi)

Coefficient of Variation, (CV)

σi / σM Beta Ranking Based on Beta

R2 Ranking Based on R2

1 1JANATAMF 7.99% -80.00 2.14 1.17 6 0.2994 11

2 1STPRIMFMF 8.99% 40.02 2.40 1.22 4 0.2575 15

3 ABB1STMF 10.86% 31.72 2.90 0.10 31 0.0014 32

4 AIBL1STIMF 4.10% 5.60 1.10 0.28 28 0.0638 28

5 ATCSLGF 4.48% 8.17 1.20 0.45 24 0.1423 25

6 CAPMBDBLMF 4.72% -4.06 1.26 0.14 30 0.0131 31

7 DBH1STMF 4.96% 7.29 1.32 0.78 17 0.3449 6

8 EBL1STMF 9.50% 4.49 2.54 1.46 2 0.3329 9

9 EBLNRBMF 5.99% -9.78 1.60 0.88 15 0.3024 10

10 EXIM1STMF 4.50% -4.19 1.20 0.51 22 0.1812 23

11 FBFIF 6.30% -14.05 1.68 1.01 9 0.3582 5

12 GRAMEENS2 5.53% 7.78 1.48 0.74 19 0.2475 16

13 GREENDELMF 5.16% 5.36 1.38 0.95 13 0.4696 1

14 ICB2NDNRB 4.94% 3.98 1.32 0.77 18 0.3421 8

15 ICB3RDNRB 7.22% 9.75 1.93 0.96 12 0.2471 17

16 ICBAMCL2ND 11.83% 8.01 3.16 1.62 1 0.2628 14

17 ICBEPMF1S1 5.20% 51.68 1.39 0.69 20 0.2441 18

18 IFIC1STMF 6.66% -13.44 1.78 1.05 7 0.3441 7

19 IFILISLMF1 6.93% 7.76 1.85 1.00 10 0.2970 12

20 LRGLOBMF1 5.01% 7.19 1.34 0.63 21 0.2204 20

21 MBL1STMF 4.22% 6.99 1.13 0.50 23 0.1937 22


22 NCCBLMF1 5.01% 13.01 1.34 0.84 16 0.3951 3

23 NLI1STMF 4.13% 4.77 1.10 0.39 27 0.1195 26

24 PF1STMF 7.39% 20.29 1.97 0.94 14 0.2280 19

25 PHPMF1 8.53% 19.04 2.28 0.97 11 0.1792 24

26 POPULAR1MF 7.69% 41.36 2.05 1.33 3 0.4140 2

27 PRIME1ICBA 7.55% 5.15 2.02 1.21 5 0.3594 4

28 RELIANCE1 3.27% 4.30 0.87 0.40 26 0.2060 21

29 SEBL1STMF 4.49% 5.16 1.20 0.16 29 0.0146 30

30 SEMLLECMF 11.59% -26.05 3.10 -0.78 32 0.0624 29

31 TRUSTB1MF 7.28% -10.35 1.94 1.01 6 0.2680 13

32 VAMLBDMF1 4.61% -11.93 1.23 0.42 4 0.1143 27

DSEX 3.74% 10.79 1.00 1.00Source: Authors calculations

Table 2 tries to illustrate, to what extent funds could achieve consistent return and diversifications as expected by the investors. 31 of the 32 funds had larger standard deviations than that of market. Ten funds have beta greater than 1, which means these ten funds are more volatile than market. 16 funds (not considering the negative values) have less CV than the market. That means, those funds (16) were able to provide more consistent returns than that of the market. The most diversified fund with the highest R2 (0.4696) was GREENDELMF. The closer the R2 is to 1.00, the more completely diversified the portfolio. This indicates that, none of the funds were well diversified. For all of the funds, ratio of total risk to standard deviation of market (σi / σM) were greater than beta. This result affirms the result of R2, indicating none of the funds were well diversified.

Table-03: Ranking Based on Ratios (Sharpe, Treynor & Jensen Alpha)

Sl. Mutual Fund Sharpe Ranking Based on Sharpe

Treynor Ranking Based on Treynor

Jensen Alpha

Ranking Based on Jensen Alpha

P value of Jensen Alpha

1 1JANATAMF -0.0394 26 -0.0027 26 -0.0047 26 0.742 1STPRIMFMF 0.0011 22 0.0001 22 -0.0015 23 0.933 ABB1STMF 0.0117 21 -0.0130 31 0.0014 17 0.954 AIBL1STIMF 0.1262 8 0.0188 2 0.0048 10 0.575 ATCSLGF 0.0744 15 0.0074 13 0.0027 16 0.756 CAPMBDBLMF -0.2919 34 -0.0956 34 -0.0140 34 0.177 DBH1STMF 0.0937 12 0.0059 16 0.0036 14 0.678 EBL1STMF 0.2003 2 0.0130 6 0.0171 1 0.309 EBLNRBMF -0.1382 32 -0.0094 30 -0.0094 31 0.3810 EXIM1STMF -0.2866 33 -0.0252 33 -0.0136 33 0.1211 FBFIF -0.1053 28 -0.0066 27 -0.0080 29 0.4612 GRAMEENS2 0.0897 14 0.0067 15 0.0040 13 0.6913 GREENDELMF 0.1449 7 0.0079 9 0.0062 6 0.4414 ICB2NDNRB 0.2075 1 0.0132 5 0.0092 4 0.2815 ICB3RDNRB 0.0728 16 0.0055 17 0.0040 11 0.7616 ICBAMCL2ND 0.1067 9 0.0078 10 0.0105 3 0.6317 ICBEPMF1S1 -0.0221 25 -0.0017 25 -0.0021 25 0.8318 IFIC1STMF -0.1067 29 -0.0068 28 -0.0085 30 0.46


19 IFILISLMF1 0.0979 10 0.0068 14 0.0055 8 0.6620 LRGLOBMF1 0.0961 11 0.0077 12 0.0040 12 0.6721 MBL1STMF 0.0922 13 0.0078 11 0.0032 15 0.6822 NCCBLMF1 0.0339 18 0.0020 19 0.0006 19 0.9423 NLI1STMF 0.1574 5 0.0168 3 0.0060 7 0.4624 PF1STMF 0.0202 20 0.0016 20 0.0002 20 0.9925 PHPMF1 0.0273 19 0.0024 18 0.0011 18 0.9526 POPULAR1MF -0.0038 24 -0.0002 24 -0.0020 24 0.8727 PRIME1ICBA 0.1659 4 0.0104 7 0.0109 2 0.4028 RELIANCE1 0.1668 3 0.0138 4 0.0049 9 0.4329 SEBL1STMF 0.1460 6 0.0420 1 0.0064 5 0.5030 SEMLLECMF -0.0569 27 0.0084 8 -0.0056 27 0.8131 TRUSTB1MF -0.1262 30 -0.0091 29 -0.0105 32 0.4332 VAMLBDMF1 -0.1305 31 -0.0145 32 -0.0066 28 0.48

DSEX 0.0352 0.0013 21 0.0000T Bill

Source: Authors calculations

From Table 3, it is prominent that, 16 funds have beat the market considering Sharpe Measures. The best three funds in terms of Sharpe measures are: ICB2NDNRB, EBL1STMF and RELIANCE1. 20 funds have better Treynor Measures than that of the market. The best three funds in terms of Treynor measures are: SEBL1STMF, AIBL1STIMF and NLI1STMF. Out of 32 funds, 20 fund had positive alpha, but none was statistically significant. The best three funds considering Jensen alpha are: EBL1STMF, PRIME1ICBA and ICBAMCL2ND. As from Table 2 it has been found that, none of the funds were completely diversified, Treynor Measure would not be appropriate for assessing risk-adjusted return performance by the funds. In addition, any statistically significant Jensen alpha could not be found in the funds. Hence, Sharpe measure can be considered to be the tools for appraising the risk-adjusted return performance by the funds.

To recapitulate, 19 funds out of 32, have beat the market in terms of annualized return. The ‘Coefficient of Variation, CV’ indicates that, 50% of the funds (16 out of 32) performed better that the market, in terms of consistent returns. The result of Sharpe measure also in line with that of CV, demonstrating 16 funds beating the market in achieving risk-adjusted return. In addition, none of the funds were well diversified, as none had R2 close to 1.00.

Analysis of the survey shows that, two crucial factors, pointed out by the investors for considering Mutual Fund as a superior investment vehicle, were consistent return and diversification. However, analysis of performance of funds shows, 50% of the funds could offer superior consistent returns than the market whereas none of the funds performed well with regard to diversification.

ConclusionThe success of mutual fund industry in a country depends on both the investors’ positive perception and the superior risk adjusted performance by the fund managers. This paper attempts to unite these two issues to discover whether mutual funds of Bangladesh are being able to perform in line with investors’ expectations. A number of studies have been carried out assessing the performance of funds, whereas this study incorporates investors’ expectations which the previous studies did not consider. Primary data analysis of the study shows that investors choose consistent return and diversification of portfolio over other factors but the performance analysis of funds depicted that, none of the funds could match the expectation of well diversification while half of funds could provide consistent return. AMC’s should emphasis on diversification of the portfolio. It is also prominent that investors prefer cash dividend over stock dividend and they are reluctant to reinvestment


unit. Investors do not like the extension of tenure and they are not satisfied enough with the performance of the mutual fund managed by the AMC’s. Although most of the potential investors who do not have any investment in Mutual Fund Industry think that equity is performing better than mutual funds; they are planning to invest in MF in near future. But lack of knowledge, reinvestment unit, existing dividend policy, tenure uncertainty etc. are limiting them from investing in mutual fund which need to be addressed. Investors’ opinion also reveals that there is a room for improving the disclosure which will help to increase investor’s reliance on the capacity of the AMCs. As per the findings of the current study, AMCs need to figure out the challenges and way out to meet the expectations of their investors. Thus, still there lies a research scope to conduct some studies to assess the strategies followed by the Asset Management Companies (AMCs) and their challenges and way forward to meet investors’ expectation.

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AppendixSurvey Questionnaire

Dear respondent,

We are conducting a survey to understand the scenario of mutual fund industry of Bangladesh. Information obtained from this study will be used only for research purposes and will be kept PRIVATE and CONFIDENTIAL. Please read the questions carefully and

answer accordingly. Thank you for participating in this questionnaire.

Occupation :

Capital Market Professional Others

Age :

Education :

1. Do you have investments in mutual fund industry?

Yes No

If yes, please respond to Q2 to Q8 and express your opinion regarding the following statements from Q2 to Q8:

1= Strongly Disagree

2 = Disagree3 = Agree4 = Strongly Agree

1 2 3 42 “I am satisfied with my mutual fund investments’ performance”

3 “I prefer the extension of tenure of mutual funds”

4 “I am okay with RIU (reinvestment unit)”

5 “I am okay with cash dividend”

6 “I am satisfied with asset managers’ disclosure of portfolio”

7 “I am satisfied with the frequency of asset managers’ disclosure of portfolio”

8 Why do you prefer investing in mutual funds other than any investment vehicles?

a) Diversification

b) Professional fund management

c) Consistent return

If No, please respond to Q9 to Q12:

1 2 3 49 Do you plan to invest in the mutual fund industry in near future?

10 Do you think that equity is performing better than mutual funds?

11 I don’t rely on the capacity of the asset management companies (AMCs).

12 From the following, which major problem(s) is/are limiting you from investing in mutual fund?

a) Lack of knowledge

b) Reinvestment Unit

c) Disclosure

d) Dividend policy

e) Tenure uncertainty

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