Mutual funds rallied strongly today (10 May) after the Bangladesh Securities and Exchange Commission (BSEC) issued detailed guidelines for converting closed-end mutual funds into open-end structures, raising investors’ expectations of improved liquidity and potential valuation gains.
All but one listed mutual fund closed higher during the session, while eight mutual funds secured spots among the top-10 gainers on the Dhaka Stock Exchange (DSE).
Market participants said the latest regulatory move has revived interest in the long-struggling mutual fund sector, where most closed-end funds have traded at steep discounts to their net asset value (NAV) for years.
Last Thursday, the securities regulator issued a comprehensive framework for converting closed-end mutual funds that face liquidation risks or mandatory transition into open-end structures.
Under rules published in the official gazette on 12 November last year, trustees of closed-end mutual funds must convene a special general meeting (SGM) if the average trading price of a fund remains over 25% below the higher of its issue price or fair-value-based NAV for six consecutive months.
At the SGM, unit holders will decide through secret ballot whether the fund will continue operations, convert into an open-end structure, or be liquidated. Approval from at least 75% of participating unit holders will be required.
The six-month compliance deadline expires on 12 May. Funds failing to meet the requirements after that date may have to initiate liquidation or conversion procedures.
According to market insiders, nearly 22 out of the country’s 34 listed closed-end mutual funds may fall under the new regulatory framework because their market prices are currently trading more than 25% below their declared asset values.
An analyst at a leading brokerage house, requesting anonymity, said institutional investors are anticipating short-term gains from deeply discounted mutual funds, as conversion or liquidation prospects could help reduce the gap between market prices and underlying asset values.
“Strong buying pressure emerged in the mutual fund sector from the start of trading on Sunday,” the analyst said.
Among the top performers, IFIL Islamic Mutual Fund-1 surged 10% to close at Tk4.40. At the same time, First Bangladesh Fixed Income Fund, PHP First Mutual Fund, AB Bank 1st Mutual Fund and Trust Bank 1st Mutual Fund each gained 10% to close at Tk3.30.
Meanwhile, NCCBL Mutual Fund-1 advanced 9.76% to Tk4.50, while EBL NRB Mutual Fund and LR Global Bangladesh Mutual Fund One rose 9.68% each to close at Tk3.40.
On the other hand, SEML FBLSL Growth Fund climbed 9.62% to Tk5.70, while Prime Bank 1st ICB AMCL Mutual Fund gained 8.89% to close at Tk4.90.
The latest BSEC directive provides detailed instructions regarding conversion timelines, valuation methods, voting structures, cost limitations, and investor rights.
The regulator has introduced a structured compliance framework involving trustees, asset managers, custodians, stock exchanges and depository institutions throughout the conversion process.
To prevent possible market manipulation, trading of fund units will remain suspended immediately after the announcement of the record date for voting.
If unit holders approve a conversion proposal, all assets, liabilities and management control of the fund will be transferred to the trustee, who will oversee and safeguard the assets until the process is completed.
The rules also make independent valuation mandatory. External auditors with no affiliation to the fund, trustee or asset manager will assess asset values, NAV and the financial condition of the fund before submitting separate valuation reports.
Following conversion, a newly structured open-end mutual fund will be required to issue a fresh prospectus, trust deed, and management agreement. Units of the new fund will be held in dematerialised form and traded or redeemed through stock exchanges.
Market participants believe the transition could significantly improve liquidity in the mutual fund sector by allowing investors to redeem units more easily than under the existing closed-end structure.
The regulator has also capped conversion-related costs at 1% of total fund size. Asset managers will be allowed to charge a maximum fee of 0.50%, while trustees can receive up to Tk1 million per scheme.
Additionally, trustees must obtain board approval at least 150 days before fund maturity or planned conversion. Once approved, price-sensitive information (PSI) must be disclosed through newspapers, online platforms and stock exchanges.
Market analysts believe the new regulations could reshape Bangladesh’s mutual fund industry in the coming months, with nearly two-thirds of listed closed-end funds potentially facing consolidation, liquidation or structural transformation.
However, analysts cautioned that fund managers may face short-term operational challenges in adapting to stricter compliance requirements, valuation standards and investor voting procedures.
BSEC Director and spokesperson Abul Kalam told TBS that the open-end structure would offer greater flexibility and improved liquidity for investors, as units could be redeemed more easily.
He added that many closed-end mutual funds had long traded at substantial discounts to NAV, raising investor concerns over valuation practices and governance transparency.
According to him, the latest reform aims to address those long-standing inefficiencies by creating a more transparent and flexible exit mechanism for unit holders.