Mutual funds gaining ground in domestic market

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)