Warning on mutual funds<\/p>\n
The rush by investors in Jakarta last month to redeem their
\nfixed-income mutual funds should serve as an early warning signal
\nto the capital market watchdog (Bapepam) to establish safeguard
\nmeasures for this rapidly-growing, yet largely unregulated,
\ninvestment instrument.<\/p>\n
Traders and analysts estimated that about Rp 30 trillion
\n(US$3.5 billion) worth of fixed-income mutual funds were redeemed
\nin the first half of last month due to confusion over the method
\nof pricing mutual funds (net asset value). However, Bapepam put
\nredemptions during the minor panic only at around Rp 4.5 trillion
\nnet, after taking into account new purchases of funds during that
\nperiod.<\/p>\n
Irrespective of the different estimates of the fund
\nredemptions, the rush should have rudely awakened Bapepam to
\nintroduce clear-cut rules regarding this financial product, which
\nhas expanded from Rp 8.5 trillion in January 2002 to a Rp 90
\ntrillion mutual fund-industry today.<\/p>\n
It appeared simply to be a coincidence that the short-time
\npanic in Indonesia was preceded by the uncovering of a scandal in
\nthe $7 trillion mutual-fund industry in the United States whereby
\nPutnam Investment Fund traders were found to have conducted
\nimproper trading practices.<\/p>\n
While the problems in the U.S. mutual-fund industry were
\nrelated mostly to improper trading of mutual funds invested in
\nstocks traded overseas, the small panic in Indonesia was caused
\nby the confusion over the method to price fixed-income mutual
\nfunds, which account for almost 90 percent of total mutual funds
\nin Indonesia.<\/p>\n
Each mutual-fund share (unit) ideally should represent the
\nvalue of the stocks or securities (bonds) held in portfolio,
\nmeaning that the funds should be priced on the basis of the
\nprevailing market value of their underlying assets. This is
\ncalled marked-to-market pricing, which is considered the most
\nfair value pricing method.<\/p>\n
However, the capital market watchdog in Indonesia has not yet
\nset clear-cut procedures for fair value-pricing of mutual-fund
\nassets. In the absence of such procedures, most fixed-income
\nmutual funds managers have thus far set their net asset value
\naccording to what they perceive to be the fair value of the
\ngovernment bonds in their portfolio, not on the basis of actual
\ndaily market prices of the bonds.<\/p>\n
So when one of the largest fund managers recently changed its
\npricing method by fixing its net asset value according to the
\ndaily market prices of their underlying assets, most of its
\ninvestors panicked because the net asset value of their funds
\nfluctuated in line with the daily movements of the bond prices.<\/p>\n
Many investors, who had previously been accustomed only to a
\nsteady rise in their fund's net asset value, rushed to redeem
\ntheir fund shares, thereby forcing fund managers to sell bonds at
\nbig discounts to raise funds.<\/p>\n
However, this panic should also be blamed partly on the market
\nperception, which fund managers had unconsciously inculcated
\namong fixed-income fund investors when they promoted their funds
\nthrough commercial banks.<\/p>\n
Mutual-fund managers often mislead investors to believe that,
\nlike time-deposits at banks, fixed-income mutual funds generate
\nfairly stable rates of returns. The major differenceand this is
\nthe main bait used to attract investorsis that fixed-income
\nmutual funds now produce higher returns as they are tied to
\nfixed-rate government bonds, while time deposit interest rates
\nare declining steadily in line with the fall in the central banks
\nshort-term interest rate.<\/p>\n
This flaunted advantage, combined with the income tax
\nexemption granted to mutual funds in the first five years after
\ntheir floating, the steady decline in time deposit interest rate
\nand the expanding market of government bonds, has been
\nresponsible for the explosive growth of the fixed-income mutual-
\nfund industry.<\/p>\n
However, fund managers apparently forgot to educate investors
\nthat the prices or value of mutual funds, though tied to fixed-
\nrate government or corporate bonds as their underlying assets,
\nmay also fluctuate daily according to the market value of the
\nbonds in the secondary market.<\/p>\n
Moreover, many investors seem not aware that mutual funds are
\nbasically a long-term investment which, like other investment
\ninstruments, has its own risks of price fluctuations.<\/p>\n
Many investors may also not realize that mutual funds, even
\nthough marketed mostly through banks, are not covered by the
\ngovernment blanket guarantee on bank deposits and claims because
\nthey are simply not a bank product.<\/p>\n
The wrong perceptions among investors about mutual funds as an
\ninvestment vehicle and the confusion over the method of pricing
\nmutual fund shares are some of the issues the capital market
\nwatchdog have to address soon.<\/p>\n
Bapepam also needs to issue clear-cut rules on mutual-funds as
\nan investment instrument and on mutual-fund trading, while the
\ncentral bank should see to it that commercial banks do not take
\nunnecessary risks by deceptively packaging mutual funds into
\ntheir financial products.<\/p>\n
_________<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/warning-on-mutual-funds-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }