Mutual funds gaining ground in domestic market

JAKARTA (JP): Testimony to the remarkable growth of open-end mutual funds is that they were almost unheard of in Indonesia just two years ago.

Today they have emerged as an important investment alternative in the country's capital market, with staggering growth recorded this year after the government allowed pension funds and insurance companies into the business.

Investors can currently take their pick of more than 35 open- end mutual funds.

This number is higher than the official government data of Feb. 28 of this year confirming the presence of 33 open-end mutual funds. These have raised over Rp 3.7 trillion (around US$1.5 billion), the equivalent of the combined assets of three healthy medium-sized commercial banks in the country.

"It is quite an achievement, given the fact that the open-end mutual funds were only introduced in July last year," Capital Market Supervisory Agency (Bapepam) Chairman I Putu Gde Ary Suta said.

Mutual funds are not completely foreign to the market as the government has allowed fund management companies to offer closed- end mutual funds to the public for the past five years.

The basic idea behind the use of mutual funds is to provide an equal opportunity to individual investors, especially those who have little knowledge of stock trading or have scant time to take care of their capital market investment.

Unfortunately, the concept for the closed-end mutual funds did not work in practice.

Analysts attributed the failure to rigid stipulations. The closed-end mutual funds must be listed on the stock exchange. This means investors are not allowed to redeem their funds directly through their fund managers but must instead trade them through the exchange.

It comes as no surprise to find a solitary closed-end fund listed on the exchange today. The fund is not only illiquid but practically obsolete. Its price has declined by almost 50 percent since its initial listing.

Many fund managers proposed open-end mutual funds as a more flexible alternative but the government's go-ahead did not come until amendments were made to the capital market law in 1995.

The new law came into effect in April of last year but regulations allowing the operation of open-end mutual funds were only introduced several months later.

PT Dana Reksa Fund Management, a subsidiary of the state-owned Danareksa Securities, was one of the first fund management firms to take of the advantage of the new business. Several other fund managers followed suit over the next few months.

The real boom began just three months ago after the Ministry of Finance issued a special regulation allowing pension funds and insurance companies to invest in the business. More than 25 of the open-end mutual funds available were set up between January and April of this year.

Soundness

The relative newness of mutual funds led to numerous questions on their soundness and value during public offerings. Queries ranging from returns on the funds to risks were commonplace.

Investing in a mutual fund is based on a collective contract, as investors must agree to the investment stipulations set by the fund managers.

This agreement covers all aspects of the funds, the fees required of investors, investment strategies set by fund managers, their redemption procedures and the role of the custodian bank.

All details are contained in the prospectus issued for each fund, said Iwan P. Pontjowinoto, the president of Danareksa Fund Management. "Basically, investors should first carefully read the prospectus before they make a decision to buy."

Many individual investors appear to be motivated by glowing reports on the returns of mutual funds than by studiously evaluating their actual benefits. "My friend told me the mutual fund is more profitable. That is why I bought into it," one investor said.

Anita Abubakar, a businesswoman, said she invested in a mutual fund after reading the information in a leaflet sent by a fund manager to her office.

"The fund managers promise higher returns than if I put the money in the bank, so why not?" she said.

Fund managers usually offer three types of mutual funds to their investors, focusing on bonds, commercial papers or the equity market.

Danareksa, for example, invests between 60 to 80 percent of money collected through its Melati fund in fixed income instruments bonds. The remaining 20 to 40 percent is funneled into short-term commercial papers. This type of fund offers a more stable and higher return than time deposits of banks.

The annual returns of Danareksa's Melati have already reached 17 percent, compared to the 13 and 14 percent of the banks.

Danareksa's two other funds, Anggrek and Mawar, which put priority on commercial paper and equity, bring less stable returns.

Returns on these "speculative" funds may be higher than those focusing on fixed-income instruments, but this does mean that they are free of risks.

Iwan acknowledged that mutual funds carry risks but said fund managers should have the skills to deal with these.

"The portfolio instrument is diversified into a range of investment alternatives to diversify the risk," he said.

He said investors in the equity market ran the risk of big losses if they selected poor stocks. "Besides, investing in the mutual funds do no require a large amount of funds," he added.

The minimum investment for Melati is Rp 100,000, and between Rp 250,000 to Rp 500,000 for other funds.

A banker warns that prospective investors should not be misled by the higher returns offered by the mutual funds because there are also two kinds of fees to be paid.

Investors in a mutual fund are required to pay between 1 and 1.5 percent in a front load fee when they begin investment in the mutual fund, and a further 1 to 2.5 percent when they redeem their funds in what is known as a redemption or back-end load fee.

Unlike the front load fee, which is set flat, the redemption fee is determined at a floating rate depending on how long investors keep their funds. If the investors redeem the funds after holding them for up to three months, for example, the redemption fee is set at 2.5 percent. It is 2 percent for between three to six months, 1.5 percent for six months to one year, and 1 percent for an investment duration of more than 12 months.

"This means that if you invest for only three months, bank savings are still more attractive. Moreover, in a bank you can withdraw your money any time you want," he said.

Mutual fund management companies, like other business entities, are taxable. They are required to pay income tax except on income derived from bonds.

Iwan, however, said that mutual fund investors, unlike bank depositors, are exempt from income tax payments. "This is one of the advantages when investing in the mutual fund."

An analyst recommended that investors look into the credentials of mutual fund managers. "The most important thing is that you must be extra careful not only in selecting the types of the funds, but also the man behind their operations... their skills and credibility."

John Budiharsana, the managing director of PT Bahana TCW Management, said the qualities and legitimacy of fund managers were unclear as they had been operating for a short period.

"It is difficult right now to judge whether an investment management company is good or not because they have only operated for one year."

A balanced appraisal of their worth can only be made after they have operated for five years, he added. (09/hen)