Why do Iranian mutual funds fail to attract individual investors?
A mutual fund is a collective investment vehicle. It is a pool of investors’ money invested in the financial or money market according to pre-specified investment objectives.
With respect to Iran, the first Iranian mutual funds were introduced to the capital market in 2008 under the supervision of the Securities and Exchange Organization (SEO), exchanges’ regulatory body in Iran.
Indeed, the development of Iranian mutual funds has been among the main concerns of the market regulator, as this provides the means for amateur and early beginners with the capital market of Iran to invest their precious savings with ease of mind and least amount of risk possible.
One can notice the importance of such investment vehicles in the stock exchanges of Iran when they witness unreasonable fluctuations in the TEDPIX Index at times of down cycles in the market environment, exacerbated with herd behaviour by a large number of scared, naïve, individual investors pulling out their capital by creating huge sell-offs.
Studies by Donya-e-Eqtesad, a well-known Economic Daily, show that the existing funds, being more than 160 according to the figures published monthly by the SEO, have a small share of the capital market of Iran.
Based on the data posted by Securities and Exchange Organization, the average value of stocks owned by funds was meagerly 0.92% in the first three months of the Iranian Calendar year—20 March-20 June–in proportion to the overall value of stocks in Tehran Stock Exchange (TSE) and Iran Fara Bourse (IFB).
Also, the average funds’ trades against the aggregate volume of normal trades in TSE and IFB, including retail and block, was just over 5.28% in the same period.
The statistics prove the notion that a great majority of these funds failed in the professional management of their resources and were not able to mitigate the inherent risks posed by the market.
The experts are of the opinion that there are a number of caveats that explain the low return incurred by such funds. There are a short-term profit-seeking culture among potential investors, loopholes in the current regulations, the small size of many funds, and weak management and analytic team working for these funds, so to speak.
Due to bad economic conditions in the recent years, most investors are not keen on indirect investment through funds in the capital market, as this mechanism might take longer to deliver profit for them. Nevertheless, in the boom market, many inexperienced and ordinary people damage the market with their over-excitement at such up cycles with unprofessional buy and sells.
Another issue with funds are the cumbersome instructions imposed by the regulator on the composition of the funds. For instance, the fund managers are not allowed to allocate more than 30 per cent of their assets to fixed-income securities, respecting the bylaws of such funds. This is bad news when the market is on a downward trajectory since the fund manager cannot liquidate a big portion of assets under management due to a dip in the stock exchange. Accordingly, maintaining this large size of equities in downbeat circumstances is a big deal.
Another case in point is a small size and low capital of most of these funds in the market which makes the administration of small, scale funds quite impossible. Their low net asset value has led to the absence of strong analytical teams in these kinds of funds. As they are not able to utilize the expert advice of professional employees, this has ended up too low returns on these funds.
Meanwhile, fixed income mutual funds proved to be more successful in attracting potential individual investors than the equity funds and hybrid funds to themselves statistically speaking.
Based on the data posted by SEO, fixed income funds registered 9.14 percentage points more return than the overall return of the Tehran Exchange market in 2015/16. This was principally due to a sizable role of banks in running these funds. Considerable amounts of capital were used to be injected into them, as the banks were able – read “had to”- pay higher interest to those clients depositing big money.
The guarantees and the credit these financial institutions presented to their special clients eased the inflow of capital to fixed-income funds and consequently, this made them more appealing against other fund types.
It seems that the policymakers responsible for the expansion of the capital market in general and investment funds, in particular, should take a more practical approach to tackle this problem. As extending and deepening of debt market is one of the big objectives of Rouhani’s administration, It sounds very important to have the funds and particularly fixed-income funds to aid developing this market as deeply as possible. This, without doubt, would help to finance the projects both by private and public companies seeking capital and in return, would let the banking system to sponsor small and medium-sized enterprises (SMEs), lacking necessary funds to continue work and some even on the verge of having to shut down.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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