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Move on mutual fund loans draws mixed reactions

SEC's new decision effective from today

Sarwar A Chowdhury
The new criteria fixed by the stock market regulator for margin loans for mutual funds have drawn mixed reactions from fund managers, investors and an academic.
The fund managers and investors fear that the new criteria will send wrong signals to market. But some experts said the restriction is a timely initiative to cool down the overvalued mutual funds.
The Securities and Exchange Commission (SEC) on Thursday announced the new criteria for margin loans against mutual funds after around two months of suspension.
The regulator said mutual funds must trade in a limited range to qualify for margin loans. The funds that trade 7.5 percent higher than their latest NAV (net asset value) will not qualify for the loans. It means if a mutual fund has Tk 100 in NAV per unit and trades only up to Tk 107.50 (7.5 percent higher than NAV), margin loans can be approved for the fund.
The decision will come into effect today.
The market trend shows the mutual funds usually trade 20 percent higher than their NAV,
Moin Al Kashem, managing director of Prime Finance Asset Management Company, told The Daily Star yesterday.
"More or less, it’s a decision of not allowing margin loans for investment securities or mutual funds," he said.
The regulator's new decision will hinder the growth of the mutual fund segment, said another asset manager, seeking anonymity. “The investors will be discouraged to spend in the sector," he said.
Some fund managers and investors have questioned the theoretical basis for the new criteria.
A few days ago, the regulator fixed the priceearnings ratio at 75 for margin loans against equity shares.
The fund managers see the new condition for loans against investment securities as an arbitrary decision.
Margin loans for any security are based on the relationship between a loan provider and a customer, said one of the fund managers.
Salahuddin Ahmed Khan, former chief executive officer of Dhaka Stock Exchange, said: "It's a smart decision by the SEC, as it will make
corrections in prices of overvalued mutual funds."
“Overpricing is not sustainable. It must see price correction," said Khan, a professor of finance at Dhaka University.
SEC Chairman Ziaul Haque Khondker could not be reached for comment despite repeated attempts.
Many retail investors said only a few mutual funds will qualify for margin loans with the newly imposed condition.
Even if some mutual funds are still eligible for margin loans, they will not qualify for the loans after a price hike, they said.
It will send a negative signal to the investors and may create volatility in the mutual fund segment, they said.
A retail investor, Alam, who gave one name because of the sensitivity of the issue, said: "It's unfortunate that the most tradable mutual funds will not get margin loans."
Currently, a total of 19 mutual funds are listed and being traded on the bourses with their combined issued capital of around Tk 500 crore.
safwar@thedailystar.net