The stock market regulator has moved to phase out closed-end mutual funds, calling them outdated, inconsistent with international standards, and lacking flexibility for investors. It also cited a long record of irregularities in their operation.
In a draft of the new mutual fund regulations, the Bangladesh Securities and Exchange Commission (BSEC) has proposed that no new closed-end schemes will be approved once the rules come into force. Only open-ended funds will be permitted in future.
For all latest news, follow The Daily Star’s Google News channel. The BSEC published the draft in October, seeking public feedback. After reviewing the responses, it will finalise the rules and issue it through a government gazette.
A senior commission official said closed-end funds often leave investors stuck for years despite poor returns.
“In many cases, closed-end funds have locked up investors’ money for a decade with little accountability on performance,” said the official, requesting anonymity.
Mutual funds pool money from investors to buy shares, bonds and other assets. In return, investors receive dividends based on profits earned.
In closed-end mutual funds, a fixed amount of capital is raised for a specific period, usually ten years, and listed on the stock exchange. Investors cannot redeem units before maturity, which limits liquidity.
By contrast, open-ended funds allow investors to buy or sell units directly from the fund manager at any time, based on the fund’s net asset value (NAV). These are not listed on the stock market.
Industry insiders say phasing out closed-end mutual funds would make the industry more transparent and investor-friendly. Several fund managers have welcomed the proposal.
Saiful Islam, president of the DSE Brokers’ Association of Bangladesh (DBA), said most fund embezzlement cases in the country occurred within closed-end mutual funds.
“This type of fund is not available anywhere else in the world,” he said.
In late October, the regulator banned its former chairman Prof Shibli Rubayat Ul Islam and LR Global Bangladesh CEO Reaz Islam from all capital market activities over their role in a share price manipulation scheme.
According to the BSEC probe, LR Global invested more than Tk 23 crore from its six closed-end mutual funds to acquire a majority stake in a delisted company. Such scandals, industry insiders say, are not uncommon.
“Our experience with closed-end mutual funds has been poor. Some even extended their tenure by ten years, disappointing investors, and that was part of the manipulation,” said Islam.
Besides, he added that the BSEC proposal aligns with international practice.
“Globally, nearly all mutual funds are open-ended, accounting for 99 percent of the total,” he said. “In India, the figure stands at around 97 to 98 percent as per the Association of Mutual Funds in India.”
Currently, there are 37 closed-end mutual funds listed on the Dhaka Stock Exchange, whose terms will expire by 2032.
Shekh Mohammad Rashedul Hasan, managing director and CEO of UCB Asset Management, said open-ended funds offer greater convenience for investors as they can withdraw money whenever they wish.
“In open-ended funds, investors can exit anytime, which keeps asset managers accountable,” he said. “In closed-end funds, managers know they will earn management fees regardless of performance, which can lead to complacency.”
He added that the proposed rules are well-structured but may need some adjustments to make implementation smoother.
However, not everyone agrees that closed-end funds should disappear entirely.
Mir Ariful Islam, CEO of Sandhani Asset Management Company, said Bangladesh’s underdeveloped capital market still needs a range of investment products.
“The market does not have many instruments. Closed-end funds can still play a role if properly regulated,” he said.
He also raised concerns about other provisions in the draft, including a proposed rise in the minimum paid-up capital for asset management companies from Tk 5 crore to Tk 10 crore, to be met within a year.
“Given the sluggish market over the past few years, many firms may struggle to double their capital in such a short time. A five-year window would be more realistic,” he said.
The draft also states that shareholders of an asset management company cannot serve as its chief executive officer, a rule some industry leaders say runs counter to global norms.
Ali Imam, founder and CEO of EDGE Asset Management, said the restriction could drive away talent.
“Asset management is a human capital business. Restricting capable shareholders from becoming CEOs goes against international norms,” he said. “Even global firms like BlackRock and T. Rowe Price have CEOs who are shareholders.”
Imam added that higher capital requirements could also discourage talented professionals with limited funds from entering the sector.