Mutual funds experience second year of booming<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
The country's mutual fund industry has entered another year of
\nrapid growth. After its value soared to Rp 46 trillion (about
\nUS$540 million) in 2002, the industry has today almost doubled to
\nRp 90 trillion.<\/p>\n
It's quite an achievement considering the money circulating in
\nthe industry was still valued at Rp 8.5 trillion early last year.<\/p>\n
The Capital Market Supervisory Agency (Bapepam) said that some
\n80 percent of the funds were invested in government
\nrecapitalization bonds, 90 percent of which carry fixed-income
\ninterest rates.<\/p>\n
Traders and analysts have attributed the enormous growth in
\nthe industry to the fact that, as an alternative investment
\ninstrument, it offers better returns as compared to others.<\/p>\n
For investors, the government bond-based mutual funds may be a
\nmore attractive investment vehicle, than bank time deposits, the
\ninterest rate of which has been steadily declining in line with
\nBank Indonesia's persistent move to cut its benchmark rate.<\/p>\n
Moreover, based on Tax Law No. 17\/2000, interest gained by
\nmutual funds invested in bonds is not subject to income tax in
\nits first five years since it was floated.<\/p>\n
This means that, while revenue from interest rates in time
\ndeposits -- currently at around 12 percent to 13 percent -- is
\nsubject to 20 percent tax, returns from the mutual funds of
\naround 13 percent to 14 percent per annum are tax free.<\/p>\n
Although investing in the country's high-flying stock market
\nis also an option, the volatile-nature of stock trading still
\nmakes it less attractive compared to the fixed-income mutual
\nfunds industry.<\/p>\n
On the supply side, an increasing number of banks are enjoying
\na number of benefits by launching mutual funds -- be it on its
\nown, or in cooperation with fund managers.<\/p>\n
Banks could prevent existing depositors from walking away due
\nto the lower interest income they would get from time deposits.<\/p>\n
Also, by doing so, the banks could cash in part of the
\ngovernment recapitalization bonds they hold, and then channel
\nthem to the corporate sector in the form of commercial lending,
\nwhich should carry a higher interest rate.<\/p>\n
However, this relatively new investment product -- which leads
\nto the fact that albeit rapidly growing, the industry is still up
\nto now largely unregulated -- needs safeguard measures in order
\nto ensure that the industry's booming trend is sustainable.<\/p>\n
Lack of clear-cut regulations on this financial product has
\ncaused some investors to underestimate the risks of investing in
\nthe mutual fund industry.<\/p>\n
As such created confusion among investors, which proved to be
\ncostly. The most recent example was a rush by investors here to
\nredeem their fixed-income mutual funds. More than Rp 10 trillion
\nworth of funds were withdrawn from the industry from October
\nuntil mid November alone, although Bapepam said the value was
\nonly Rp 5 trillion.<\/p>\n
Still, it sends clear signals that the industry could well be
\nheading in the opposite direction.<\/p>\n
Many reasons have been said to be behind the move. Some said
\nit was a physiological impact of the fact that the mutual funds
\nare not guaranteed under the government's blanket guarantee
\nprogram -- information that failed to be publicized by Bapepam as
\nthe capital market watchdog. Under the blanket guarantee program,
\nthe government would cover all obligations of banks if they go
\nunder. But not money invested in mutual funds launched by banks.<\/p>\n
Some also pointed at plans by the tax office to amend the
\nexisting tax law to allow it to slap income tax on the industry.
\nThe tax-free facility for mutual funds investing in bonds was
\ninitially launched in 1983 and was later amended in 1994 to help
\nboost the domestic capital market.<\/p>\n
Gadjah Mada University (UGM) economist Sri Adiningsih has said
\nthat the tax-free facility could cause the government a potential
\ntax loss of up to Rp 2.5 trillion per annum.<\/p>\n
The tax office is concerned that the growing number of banks
\nlaunching mutual funds could threaten the income tax revenue
\ntargeted from the bank's time deposits this year. The government
\nis targeting an income tax revenue of Rp 213 trillion this year.
\nTax revenue is the main source of income to finance the state
\nbudget.<\/p>\n
The last but probably the most foremost reason for the
\nredemption move was likely the plan by Bapepam to introduce a new
\nasset value pricing scheme called the marked-to-market pricing
\nsystem.<\/p>\n
Under the plan, each unit of the mutual funds should represent
\nthe value of the stocks or securities or bonds held in portfolio,
\nmeaning that the funds should be priced on the basis of the
\nmarket value of their underlying assets.<\/p>\n
This method is considered the most fair and common value
\npricing method. Previously, most fixed-income mutual funds
\nmanagers have set their asset value based on their valuation of
\nthe bonds in their portfolio.<\/p>\n
Reports said the plan had created jitters among investors as
\nthey were not used to having the price of the bonds fluctuate
\nbased on daily movement of the market.<\/p>\n
Whatever the reasons might be, the authority -- Bapepam, tax
\noffice, Bank Indonesia -- have to all sit together and tackle
\nthose problems immediately, if the country wants the mutual funds
\nindustry to develop further in times to come.<\/p>\n
Strong coordination among those departments is the key word to
\nbe able to do for the best interest of this multi-institutional
\nindustry.<\/p>\n
While Bapepam also needs to issue regulations on the industry
\nas an investment instrument, as well as its trading system, the
\ncentral bank and the tax office will have to also work together
\nin their respective fields to help develop the industry, without
\nhaving to jeopardize their own interests.<\/p>\n
As the World Bank puts in its report on the country's economy:
\n"Thus far, these sizable redemptions have not caused stress to
\nthe system, but close monitoring by the government is needed to
\nensure no liquidity problems for banks."<\/p>",
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