Zulfiqar Hasan

Abstract:
Unit fund is and open ended mutual fund which are not usually sold to the institutional investors. In Bangladesh the Investment Corporation of Bangladesh (ICB) is the introducer of this kind of Unit fund. This article intends to examine the performance of ICB unit fund from a time period of 2001-2006 by using various financial tools and techniques. As the concept of unit fund is not so familiar to the Bangladeshi small and medium investor, this article may help them to grow interest about this. This article also examines the unit fund management of ICB. The main findings of this research paper is that investing in this unit funds is somehow low risky than other types of financial instruments in the Bangladeshi Financial Markets.

(Author: Zulfiqar Hasan, is a university teacher, working as an Associate Professor of Finance)

1.0 INTRODUCTION:
In Bangladesh, the concept of Unit fund is so narrow to the investors as well as the financial institutions. The Investment Corporation of Bangladesh is the introducer of Unit Funds in Bangladesh. ICB unit is an open-end mutual fund through which the small and medium savers get opportunity to invest their savings in a balanced and relatively low risk portfolio. It ensures a continuous and regular flow of income for the holders and is easily encashable. The responsibility undertaken for managing the fund, management fee charges Taka 1.0 per unit sold. Instead of cash dividend, one can reinvest his/her dividend income under cumulative Investment Plan (CIP) to purchase additional units with a price rebate.

So how the unit funds are mobilized, how it is functioning, who can invest in unit funds, what are the benefits for the investors in unit funds in Bangladesh requires a great demand for research and discussion. This article has attempted to analyze the above.

2.0 OBJECTIVES:
As the investment in unit fund is not widely used by the investors, the article aims to create awareness among the potential investors about unit fund. Beside this, the research mainly focused on the performance of Investment Corporation of Bangladesh (ICB) to give a scenario of management of Units fund and find out the reasons for which the potential investors of Bangladesh can easily invest in this sector fearlessly.

3.0 METHODOLOGY:
Both primary and secondary data are used in this research paper. Primary data and other related information are collected with the help of discussion and consultation with the respective personnel working in various departments of ICB. Observation method is used in collection of primary data. Secondary data are collected from different year’s annual reports of ICB, news paper, websites, unpublished work of different scholars etc.
For analytical purpose some computer software for example SPSS, MS-Excel, Financial Spread Sheets are used in this article. For making simplicity in calculation, the time limit was fixed from year of 2001 through year of 2006. But for analyzing the Balance Sheet and Income Statement, only Year 2005 and Year 2006 is considered.

4.0 RESULT AND DISCUSSION:

4.1 Meaning of Unit Funds
Unit Funds are pools of money invested in a portfolio that is fixed the life of the fund (Bodie 2002). To form a unit fund, a sponsor, typically a brokerage firm buys a portfolio of securities which are deposited into a trust. It then sells to the public shares, or “units” in the trust, called redeemable unit funds. All income and payments of principal from the portfolio are paid out by the fund’s trustees (a bank or trust Company) to the shareholders.

Investors who wish to liquidate their holdings of a unit investment trust may sell the shares back to the trustee for net asset value. The trustees can either sell through securities from the asset portfolio to obtain the cash necessary to pay the investor, or they may instead sell the shares to a new investor.

4.2 Types of Unit Funds
Usually unit funds are two types: Open-end funds and Closed-end funds. Open-end funds stand ready to redeem or issue shares at their net asset value (although both purchases and redemptions may involve sales charges). When investors in open-end funds wish to “cash out” their shares, they sell them back to the fund at NAV. In contrast, closed-end funds do not redeem or issue shares. Investors in closed-end funds who wish to cash out must sell their shares to other investors.

4.3 ICB Unit Fund
ICB launched its Unit Fund Scheme on 10 April 1981. This is an open-end mutual fund, through which small and medium savers get an opportunity to invest their savings at any time of the year. The fund is divided into units known generally as ICB units, each of which bears a certain value in the assets of the fund. These units are sold to the public. ICB units can also be purchased by Bangladeshi citizens living abroad and foreigners residing in the country. Unit holders are the owners of the fund, while ICB takes the responsibility of managing the fund and loading and unloading securities in their interest. ICB floated its first mutual fund in 1980 and the number of its mutual funds increased to 8 by 2000.The total paid up capital of the mutual funds is Tk 175 million. In 2001, the corporation disclosed its decision to issue the 9th mutual fund of Tk 100 million.

On ICB’s websites, about its Unit Fund is said, “Sponsored by the Government of Bangladesh, ICB Unit Fund was established on April 10, 1981. Its main objective is to mobilize savings through sale of its units to small investors and invest these funds in marketable securities. The scheme provides a potential source of equity and debt to industrial and commercial concerns and thus contributes to the industrial development of the country.”

Unit fund is an open ended Mutual Fund. It provides an opportunity to the unit holders to invest their funds in a well managed and diversified portfolio with a high degree of security of capital and reasonable yearly returns. ICB units are securities within the meaning of Trust Act. 1882.

ICB has so far declared attractive dividends on units every year ranging from Taka 11.5 to Taka 25.0 per unit. Investment in units enjoys tax benefits, amount being applicable as per law. However, under the ICB’s restructuring program new unit certificate are being sold by ICB’s subsidiary company, the ICB Asset Management Company Ltd. (ICB AMCL).

Table 01: ICB Unit Fund at a Glance (Taka in Crore)

Source: Annual Report 2005-06, ICB Unit Fund, ICB, Dhaka

The above table shows that the trend of repurchase unit is always higher than the gross issues. Except year 2001-02 and 2002-03, the investment in market price is higher than the investment at cost.

4.4 Characteristics of ICB Unit Funds
The following features are found from the analysis of the ICB unit fund:

1. It is an open ended Mutual Fund through which the small and medium savers get opportunity to invest their savings in a balanced and relatively low risk portfolio.
2. An individual could buy maximum 10000 units in his/her own or joint name.
3. Units are not sold to institutions
4. Transaction took place on every working day.
5. ICB has so far declared attractive dividends on units every year ranging from Tk. 14.00 to Tk. 25.00 per unit.
6. Transactions remain suspended during the month of July every year for book closure and dividend declaration.
7. In lieu of cash dividend, one can reinvest his/her dividend income under CIP (Cumulative Investment Plan) to purchase additional units with a price rebate.
8. Investment in units enjoys tax benefit, amount being applicable as per law.

4.5 Issue, Transfer and Surrender of ICB’s Unit Certificates
ICB’s websites (http://www.icb.gov.bd/unit_fund.php) mentions all of the rules and regulations regarding issuance of Unit Certificates, how to transfer of ownership and the process of surrendering as follows:

• Units are available in 1, 5, 10, 50, 100, 500, 1000, & 5000 denominations. The names with addresses of the holders are recorded and dividends are dispatched to them accorded and dividends are dispatched to them accordingly.
• Units may be transferred through prescribed transfer form duly filled in and signed by the transferor and transferee. No stamp duty is required for such transfers.
• Units may be encashed by way of surrendering the certificates along with the prescribed surrender forms duly filled in and signed by the registered holders and no prior notice is required. The certificates are required to be surrendered at the prevailing Repurchase Price.

4.6 Price Fixation and Public Participation
Changes in repurchase prices of units are notified through the newspapers and price of a Unit is fixed periodically by ICB as its fund manager. Among others, valuations of the assets of the Fund are taken into consideration while fixing price of a unit. The Fund is divided into units which are generally known as "ICB Unit". Each Unit bears a certain value in the assets of the Fund. The Unit holders are the owners of the fund and only they are benefited from it. Unit certificates can be purchased in single or joint name (s). At present maximum of 10,000 Units can be purchased in a single or joint name(S) at a time. Units are not sold to institutions.

4.7 Dividend Performance of ICB Unit fund
The total income earned on investment/ deployment of funds, net of expenditures incurred, in a financial year is distributed among the unit holders as dividend. Dividend is normally declared at the end of July each year by the Board of Directors of ICB. Dividend Warrants are despatched soon after declaration of dividend. The rate of Yearly Dividend declared/paid during Financial Year 2001-02 to till 2005-06 are as under:

Table 02: Year-wise Dividend and Dividend Yield of ICB Unit Fund

Source: Annual Report of ICB (2005-06)

4.7.1 Analysis of ICB Unit Fund Dividend Yield Curve
Information given on the above table, an yield curve can be drawn which is a line that plots the dividend rates, at a set point in time, of unit certificates having equal credit quality, but differing maturity dates. From the curve we can predict changes in economic output and growth.

Figure 01: Dividend Yield Curve of ICB Unit Fund

The curve is somehow downward sloping, means that the fund management is somehow poorly managed.

4.7.2 Dividend and Interest Income Performance
In 2005-06 the fund earned and amount of Tk 20.55 crore as dividend from 136 companies and interest on debenture securities of Tk. 1.57 crore from 5 companies resulting in total dividend and interest income of Tk 22.12 crore of which 70.30 per cent i.e. Tk. 15.55 crore was received in cash (Annual Report 2005-06). The total dividend and interest income during 2004-05 was Tk 22.69 crore. That means, during year 2005-06, the dividend and interest earnings are somehow lower than that of year 2004-05.

4.7.3 Capital Gains on Sale of Investments
During 2005-06 the fund earned an amount of Tk. 53.15 crore as capital gain by selling securities of 60 companies compared to Tk. 77.15 crore earned in 2004-05 by selling securities of 84 Companies. It indicates that the ICB gives more emphasize to cumulative investment (CIP) plan.

4.8 Benefits of Investing in ICB Unit Fund
Investors who have already invested in ICB unit fund or the potential investor will get some tax benefit by the following ways:

1. Investment in Units enjoys the benefit of Investment Allowance under Sec. 44 of Income Tax ordinance 1984.
2. Units are treated as approved securities in accordance with the Section 2993 of the Companies Act.,1994 and Insurance Act, 1938. These are also treated as Securities as per Sec. 20 of the Trust Act, 1882.

The Daily Newage reported than the ICB unit funds are also exempted from annual fees and other conditions.

4.9 Occupation-wise Classification of Unit Holders
Unit certificate are purchased by different sectors of people living in Bangladesh or Bangladeshis residing abroad. Following table gives a snap shot of the Unit holders.

Table 03: Types of Unit Holders

Sourse: Annual Report 2005-06, page no. 39

The number of unit holders as on 30 June 2006 was 27098. The above table shows out of total Unit holders as on 30 June 2006, Public and Private Sector employees accounted for maximum of 57.88 percent who are mainly of small and medium size income group. It indicates that the unit fund has been succeeded in attracting small and medium size savers.

4.10 Analysis of Balance Sheet
Based on the observation of the balance sheet of year 2005 and 2006, it is found that the Cash at Bank of year 2006 is slightly higher Taka 11474344 than that of year 2005. It indicates that the company gained short term financial solvency than its previous year. It also consumes more liquidity position than previous year.

Table 04: Liquidity position of year 2005 and 2006

Source: Created (Based on Annual Report 2005-06)

The liquidity position shows the relationships of a firm’s cash and other current assets to its current liabilities (Besley & Brigham 2005) . Though the net working capital position is better in year 2006, but total liabilities is also higher in 2006 comparing in year 2005. Hence the Current ratio is already decreased in year 2006. The amount of distributable income increased Taka 43722450 in year 2006, which may be invested in cumulative invested plan (CIP) process.

4.11 Analysis of Income Statement
Though the performance and fund management of ICB unit funds seems to good, but unfortunately the net income went down by Taka 83107600 that means profit decreased by 13.60% unexpectedly. The reason behind this decreasing trend comes from the lower dividend income, interest on bank deposits and lower profit on Sale of Marketable Investment than those of year 2005. The expenditure section proves that the ICB’s management tried best to control the cost of operation. For example the commission and brokerage charge was Taka 7949005 in year 2005, where as it was Taka 6240235 in year 2006.

5.0 RECOMMENDATIONS AND CONCLUSIONS

As an investment bank ICB provides various products to its clients like as, investor’s scheme to mutual funds, from lease financing to underwriting, acting as a financial counsel to provision of trustee and many other activities that had enticed the small and medium savers to invest their idle fund in this corporation. Though these products are subject to market risk, there is a likely effect of fluctuation in the market capitalization of the portfolio. ICB Unit funds reinvest their fund in portfolio shares. They receive dividend, interest or capital gains from these. ICB also re-distribute their dividend to the investors, who had invested in the Unit funds.

Cumulative Investment Plan of Unit funds gives a slightly risk free feelings to the investors. As at this moment, ICB is not directly handling the unit funds, rather it is operating by Asset Management Company Limited (AMCL), a subsidiary of ICB; it can take some initiative to train up its employees to provide quick and better service to the investor. For attracting new investor, both ICB and AMCL can take awareness programs and activities. To be familiar with and known to general public the ICB can arrange seminars, highlight in different magazines and advertise in the different dailies.

As the recent performance seems to downward in terms of profit generating, liabilities control and dividend payout ratio, it should take strong managerial decision to improve its quality of managing fund. Investing by costly borrowing funds should be reduced. Management may look for resources of less costly funds and reduce expenses and increase income.

REFERENCES:

Bodie ZVI, Kane Alex, Marcus Alan J., “ Investments”, 5th International Edition, McGraw-Hill, USA
Banglapedia websites: http://banglapedia.search.com.bd/HT/I_0085.htm
Websites of ICB: http://www.icb.gov.bd/unit_fund.php (access August 2007)
The Daily Newage websites: www.newagebd.com/2007/feb/21/busi.html, Feb 21, 2007
Foster, George (2002), “Financial Statement Analysis”, 2nd Edition, Pearson Education Asia, India
Annual Report of ICB, 2005-06
Annual Report of ICB Unit Find, 2005-06
ICB Ordinance, as amended up to 6th July, 2000
Madura, Jeff (2006), “Financial Markets and Institutions”, 7th Edition, Thomson-South-Western publication, USA
Sharpe, William F., Alexander, Gordon J. and Bailey, Jeffery V., (2002), “Investment”, 6th Edition, Prentice Hall, India
Besley, Scott, Brigham Eugene F (200), “ Essentials of Managerial Finance”, 13th Edition, Thomson- South-Western publication, USA