After enactment of two very important laws in Iran including Stock Exchange Act, 2005 and the Law for Development of New Financial Instruments and Institutions, 2009, Iranian legislator has taken an important step in development of Iran’s capital market and coordination of this market with pioneer financial markets.
Therefore, Iran’s capital market entered a new phase in which the legal context was provided for activity of new financial instruments after enactment of the two mentioned laws. One of the instruments which had been commissioned even before enactment of the Law for Development of New Financial Instruments and Institutions in Iran’s capital market was mutual funds so that the first mutual fund started working in July 2007 and stock funds started working in early 2008 besides fixed income funds. The first exchange traded fund (ETF) was commissioned in September 2013.
Brief description of Iran’s capital market and funds
Iran’s capital market with approximate age of half a century old and with the market size of about $120 billion which has accepted about 500 companies in 48 different industries and average return of 40% over the past 10 years is one of the markets which have attracted attention of the local and foreign investors. Thus, after there was opportunity for activity of the mutual funds, we saw interest of real and legal investors in this new instrument so that 131 mutual funds with composition and diversity as described in the following Table are working after 6 years of starting activity of these funds until October 2014.
Structure of Funds
Considering the provisions of the prospectus for these funds, mutual funds in Iran are only permitted to buy and sell securities, participatory bonds and sukuk bonds. In addition, the main elements of the funds include:
Fund manager, guarantor, trustee, market maker and auditor
Fund manager is the executive element and specialist in the main activity of fund and manages investment decisions and notifies all investors of the performance results by different means such as fund sites and newsletters. In Iran, stock brokers, investment companies and asset management companies shall perform this task.
The fund trustee is the supervisory element of the fund which is responsible for continual supervision on performance of the fund manager and guarantor in conformity with the laws. In Iran, investment consulting companies and trusted auditors of the stock perform this duty.
The fund guarantor is the person who guarantees liquidity of the fund and is ready anytime to finance the liquidity in case the investors tend to leave the fund and there is no adequate liquidity. The presence of guarantor in mutual funds is one of the most distinguished advantages of mutual funds in Iran because acceptation of this highly important risk allows investors to receive their capital in cash at the current value regardless of the fact that liquidity can be financed by selling the assets of the fund at that time. In Iran, banks, capital financing companies and investment companies assume this role.
Market maker has replaced guarantor in exchange traded funds and provides liquidity of the investment units through the existing mechanisms. In Iran, capital financing companies generally play this role.
Costs of Fund
Funds receive commission fee from their investors for provision of services and reasonable profits. The fund with high costs naturally must have higher performance than the funds with lower costs. At present, intensive competition in mutual funds industry in global level has led to efforts to reduce costs continuously. Statistics show that investors are increasingly sensitive to costs and have high tendency to invest in funds with lower costs. At present, the average cost received from fund of the investors in Iran is between 3 and 5 % per year.
Assessment of Funds’ Performance
Considering the importance of criterion for selection of mutual for market analysts and other investors, funds are assessed in Iran with different models such as random priority criterion, TOPSIS strategic model, Modigliani & Modigliani Index, RAP, Graham-Harvey and Traynor Ratio index.
Returns of Funds
Over the past years, mutual funds of Iran could provide an acceptable performance and this increased tendency of investors to use these instruments. For your information, the following Table shows mean return of Iranian funds during one year ended to September 2014, March 2014 and March 2013 and total mean return of the funds from the beginning of the activity until now.
By investigating the performance of all types of mutual funds in Iran, we will notice that despite the poor economic space for Iran due to sanctions resulting in increased systematic risks of investment in Iran, Iran’s capital market could give a very acceptable return to investors over the past 6 years considering its exceptional potentials.
Investment Funds of Iran are not an exception and still continue their growing movement in terms of number, diversity and increase in managed resources. Hence, all active investors in financial markets are recommended to examine and supervise on Iran’s capital market specifically because in the current situation which there is chance of economic opening as result of Iran’s nuclear negotiations, pioneers who enter the Iran’s capital market will be the winners.