Stagnancy in mutual fund sector

All over the world, mutual funds are very popular investment options, which translate long-term savings into long-term investments.

By looking at the development of the sector in India, one can understand its contribution: India's mutual fund size is $468 billion in 2022 compared to $1.3 billion in Bangladesh.

One can also understand the demand for mutual funds in Asia by comparing the asset under management to the GDP ratio across various nations. In 2019, the ratio was 54 per cent in Malaysia, 14 per cent in India, 13 per cent in China, 2 per cent in Pakistan, and 0.5 per cent in Bangladesh.

The higher the development of a country, the higher the size of the mutual fund industry.

Sustainable and impactful development requires long-term investment. Mutual funds provide longer-term financing that banks can't provide.

The Bangladesh Securities and Exchange Commission (BSEC) has brought in significant changes, including in the areas of corporate governance and fairness of audited reports of mutual funds, which are positive for the long term. Despite the efforts, it has remained a dwarf industry.

People invest in mutual funds because they do not prefer investing in the capital market directly. There may be many reasons for that. They might not have adequate time and skill. They expect professionally managed funds to provide a better return while managing risks.

If there were no incentives offered by mutual funds, investors will shy away from them.

One of the major obstacles is tax inefficiency.

For example, a Tk 1 income by an investor thanks to an investment in mutual funds is taxed at five levels, while direct investing is taxed at three levels.

There is no parity and no economic sense for investing in mutual funds for a rational being. Mutual funds by default have become an inefficient savings tool.

In 2022, mutual funds are taxed in the following manner: corporates pay respective tax and pay dividends; dividend income is taxed at 20 per cent when a mutual fund receives it; and if a mutual fund invests in fixed-income securities, interest income is taxed at 10 per cent at the fund level.

If a mutual fund invests in shares, it realises capital gain that is not taxed at the fund level. Because of the mandatory provision of the BSEC Mutual Fund Rules 2001, a mutual fund has to pay a cash dividend. At the time of dividend payment from mutual funds, the entire capital gain is at taxed 10 per cent for individuals.

Lastly, if the same person has a certain level of taxable income, they must pay additional tax at the time of assessment on this capital gain. If the individual had invested directly in the share market, he would not have to pay the tax on capital gains.

But in India, mutual funds are treated as pass-through vehicles for income tax and therefore, they do not pay long-term capital gains tax or short-term capital gain tax on any stock or bond that they buy or sell. It is fully tax exempted at the fund level. The income from mutual funds is taxed once which is only at investor's hand. 

So, without establishing a level-playing field, the mutual fund sector will not grow. The consequence will be a lack of efficiency in financial intermediation.

The bigger the mutual fund sector becomes, the bigger the investment activity will be. Hence, the contribution of the sector to the economy will lead to the achievement of our future aspirations significantly.

The author is managing director of Ekush Wealth Management Limited. He can be reached at ahsan.maruf154@gmail.com. Views are personal.