The allure of fixed-income mutual funds to investors in 2024

Fixed-income mutual funds have the potential to become a preferable and smart investment tool now, with the advantage of the rising interest rates and floor price frustrating investors over equity investments.

A handful of open-ended mutual funds are designed to inject investments only into fixed-income securities - Treasury bills and bonds, corporate bonds, and other fixed-income vehicles in the money market.

Such pooled funds started receiving regulatory approval since 2021, initiated by Dr. Mizanur Rahman, commissioner of the Bangladesh Securities and Exchange Commission (BSEC).

So far, seven open-ended fixed-income MFs have been launched.

The especially-purposed instrument can offer a better return than other instruments amid the rise in interest rates of Treasury bills and bonds.

Referring to the performance of IDLC Income Fund launched in 2021, Rajib Kumar Dey, managing director of IDLC Asset Management Ltd, said, "We are transferring our funds from other fixed-income assets to Treasury bonds as their return is going up."

He said that when the rate of Treasury bills was 4.5 per cent, the MF could secure an annual return of 7 to 7.5 per cent, supported by other assets.

"Now the rate of Treasury bills, bonds rose to 11.5 per cent. We will do even better."

Mr Rahman said the idea of fixed-asset focused mutual funds had come up in finding a way to improve the health of the sector.

"I found that the industry was in a bad shape for investing in equity securities."

According to the securities rules, mutual funds shall not invest less than 60 per cent of the total assets in the capital market, out of which at least 50 per cent shall be invested in equity securities.

But fixed-income funds have injected 75 per cent or more into fixed-income government securities and the rest in other types of fixed assets, avoiding the risk of equity investments. This has been possible since the regulator has not imposed any ceiling on investments in fixed-income assets.

Analysts believe the open-ended funds will be better investment tool than bank deposits.

Yields of Treasury bills and bonds are expected to rise further in the coming months whereas deposit rates will not be climbing up as quickly.

As of Sunday, one-year Treasury bills offered up to 11.5 per cent interest whereas returns from deposits in banks or non-bank financial institutions were much lower than that.

Moreover, there is no default risk associated with government securities.

Investors will get direct and indirect tax advantages for investments in Treasury bills and bonds qualify for tax rebate. But bank deposits do not.

The income of mutual funds does not fall under the purview of tax either at the fund level.

Besides, these open-end mutual funds are highly liquid; unitholders can liquidate their assets in 3-5 business days, realising profit at the net asset value, whereas bank depositors do not get the promised return in case of premature liquidation.

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