Open-ended mutual funds can rebuild capital market trust

Mutual funds play a vital role in modern capital markets. By pooling savings from thousands of small investors and investing them in diversified portfolios of stocks and bonds, they help make the market more efficient, liquid and stable. For ordinary investors, mutual funds offer a simple way to take part in the market without having to research or monitor individual securities.

Yet the mutual fund industry of Bangladesh remains tiny and underdeveloped. Mutual fund assets amount to barely 3.5 percent of total equity market capitalisation, one of the lowest ratios in Asia. The limited size of the industry is not due to a lack of savings or interest. It reflects a deep trust deficit rooted in the structure and governance of the funds.

For many years, Bangladesh relied on closed-end mutual funds. These funds issue a fixed number of units for a fixed period, usually ten years. Investors can sell their units only in the secondary market, not back to the fund.

In principle, a fund’s price should reflect the value of its underlying assets, or net asset value, known as NAV. In practice, most closed-end funds in Bangladesh trade at steep discounts, often 30 to 40 percent below NAV. Such discounts signal low confidence in how fund assets are valued and managed.

Once confidence erodes, investors in closed-end funds have no clear exit. They cannot redeem units at fair value and must accept whatever price the market offers. This lack of liquidity discourages new investors and traps existing ones. It is a flaw that continues to weigh on the industry.

There have been moments when the market has swung to the opposite extreme. At various points in financial history, closed-end funds in Bangladesh traded at irrational premiums, sometimes hundreds of percent above NAV. These prices had no economic basis. A mutual fund is a portfolio of securities, and its worth cannot exceed the value of those holdings. Such premiums show distortion, not value creation. Across the world, open-ended mutual funds dominate. They issue and redeem units continuously at prices tied to NAV. Investors can buy or sell at fair value, which ensures equal treatment and market discipline.

Open-ended funds offer qualities that are essential for rebuilding trust in the capital market of Bangladesh. Investors can redeem units whenever they choose and receive the current NAV, which removes the risk of being trapped in a discounted or illiquid market.

Because investors can exit at any time, fund managers must maintain honest valuation and prudent portfolio management. Any lack of transparency may prompt redemptions, creating a natural corrective mechanism. Globally, more than 99 percent of mutual fund assets are held in open-ended funds, reflecting decades of evidence that this structure best protects investors while supporting market stability.

Bangladesh has begun to move in the right direction. The number of open-ended funds now exceeds the number of closed-end funds, although their combined assets remain smaller because most are recent. Almost all new approvals are open-ended, signalling a positive shift in regulatory and investor preference.

The securities regulator can build on this momentum by phasing out closed-end structures over time, requiring full transparency in NAV calculation and disclosure, and ensuring prompt redemptions for open-ended investors. These steps would strengthen investor protection and deepen the capital market by channelling long-term savings into professionally managed portfolios. A stronger open-ended fund industry would help reduce volatility, curb speculation and direct more capital towards productive enterprises.

The mutual fund industry of Bangladesh suffers not from a lack of potential but from a lack of trust. Investors have witnessed mispricing, weak governance and long delays in liquidation. The open-ended structure answers these concerns. It guarantees fair exit options, enforces valuation discipline and links the credibility of fund managers to daily performance.

If the aim is to rebuild confidence, attract long-term investors and align with global standards, then open-ended funds are essential. A mature capital market requires investors to believe that their money is fairly valued and easily accessible. Open-ended mutual funds can help make that possible.

The writer is the CEO of VIPB Asset Management Company