New law gives legal basis for mutual fund industry

New law gives legal basis for mutual fund industry

JAKARTA (JP): The new capital market law provides a strong legal foundation for the development of a mutual fund industry in Indonesia, says Minister of Finance Mar'ie Muhammad.

Mar'ie said yesterday that the new capital market law, which will become effective in January, does not only stipulate guidelines for the operation of mutual fund companies but also rulings related to the protection of investors.

In his keynote address at a one-day conference on a mutual fund industry, the minister said that the development of the mutual fund industry is one important strategy in expanding the country's capital market.

Another key factor, according to the minister, is to increase confidence in capital market institutions.

The importance of mutual funds for the development of the domestic capital market is that this form of investment allows small investors to obtain the benefits of a professionally managed and diversified portfolio of securities at reasonable costs, he said.

"By offering savers a convenient and less risky way to participate in the capital market, a broader participation in the market is encouraged," the minister said in his written speech, which was read by Chairman of the Capital Market Supervisory Agency (Bapepam) I Putu Gede Ary Suta.

Speakers at the conference, jointly sponsored by Bapepam and Hong Kong-based Merrill Lynch Asset Management, included Bank Indonesia Governor J. Soedradjad Djiwandono and a number of Merrill Lynch executives.

The newly open-end mutual funds authorized by the capital market law are an investment product designed for ordinary people.

Bapepam should, therefore, step up its supervision to protect small investors, he said.

"When small investors are defrauded by unscrupulous securities sales persons, the pain and suffering caused to individuals is much greater than an equivalent loss to a sophisticated financial institution," he said.

The new capital market law imposes severe penalties for securities fraud, mostly related to the marketing process, he said, citing that a sales person who defrauds an investor when selling a mutual fund product could face criminal sanctions of up to 10 years in jail.

"This might seem excessive, until we remember that defrauding a small investor may mean taking away a lifetime of savings," he said.

Investing through mutual funds will benefit individual savers because they will consequently acquire access to capital market investment instruments, which provide better matching of long- term liabilities, such as retirement and education, with long- term investment assets such as stocks and bonds.

Soedradjad said that the establishment of a mutual fund industry will provide an alternative investment for individual investors besides the traditional forms of investment such as bank deposits, gold or property.

He said that the emergence of the industry would complement the banking system rather than substitute it.

"In a way, it would appear that the development of this industry will divert some potential bank customers into the capital market," he said.

However, as is the case in other countries, the pool of money being received by the issuers of shares will in one way or another feed back to the banking system, he said. (hen)