Экономика/4. Инвестиционная деятельность и

фондовые рынки

Seilkhanova K.S.

Kazakh British Technical University, Kazakhstan

Development of mutual funds in

the Republic of Kazakhstan

Mutual fund is a form of collective investment. Through collecting pool of funds from individual investors management companies establish a mutual fund portfolio and manage it in exchange for fees in form of some percentage from annual return of the portfolio. First created in 1924 by Massachusetts Investors Trust and the State Street Investment trust, nowadays the idea of mutual fund is widely popular in the world [1].

The development of mutual funds in the Republic of Kazakhstan began from the enactment of the Law “About investment funds” on 7 July 2004.

The Law defines three types of investment funds in the Republic of Kazakhstan, which are mutual funds, equity funds, and real estate funds. Mutual fund is the collection of money owned by share holders and which is under management of a management company. The money is transferred into funds as payment for shares, and other assets acquired as a result of their investment. During the initial issue of shares the management company sells shares at the nominal value in order to form the minimum size of mutual fund. After the management company collected needed funds, shares can be bought by investors at the current value of share, which is calculated as the net asset value divided by the number of outstanding shares [2].

Mutual fund can operate as one of the following forms in accordance with the Law of the Republic of Kazakhstan:

1. Open-end mutual fund provides its share holders the right to claim a buyout of the share from the management company at least once every two weeks.

2. Interval mutual fund provides such right at least once a year.

3. In contrast, closed-end mutual fund is established for a specified period and during that time, shares are not redeemed. Time and periods of buyout of shares are determined by the management company and prescribed in the Rules of mutual fund. Usually this type of fund is created under the specific projects and an investor can sell shares only after the completion of these projects.

Based on the reports of Agency of the Republic of Kazakhstan on regulation and supervision of financial market and financial organizations, Figure 1 shows changes in the number of mutual funds in Kazakhstan in the last five years [3].

Figure 1 – Dynamics of changes in the number of mutual

funds in Kazakhstan 01.01.2007-01.01.2011

Number of mutual funds operating in Kazakhstan increased sharply during 2007. But after the crisis 2008-2009 the activity of mutual funds declined. Besides this, the bar chart shows the peculiarity of mutual funds in Kazakhstan, the majority of them are formed as closed-end mutual funds.

After the crisis mutual funds shifted from risky strategy to more conservative one. As a result, the proportion of equity and bonds in the mutual fund portfolio changed in favor for bonds (because of fixed income).

Although the activity of mutual funds slowed down during crisis, in my opinion in post-crisis period there are good perspectives of mutual funds development in Kazakhstan.

The main driver will be the increase in peoples’ awareness of mutual fund as an investment vehicle, and its comparative advantages. This effect is expected from Program of increasing investment culture and financial literacy in the Republic of Kazakhstan (2007-2011), within which Regional Financial Centre of Almaty organizes free seminars about financial instruments.

There are several advantages of investing into mutual funds, which will drive attractiveness to investors. Mutual funds allow shareholders to pool their resources so that they can take advantage of lower transaction costs when buying large blocks of stocks or bonds. In addition, mutual funds allow shareholders to hold more diversified portfolios than they otherwise would. Besides this, a management company of mutual fund has professional analysts and portfolio managers; as a result, it invests money of clients with professional skills. This means, that in order to invest money people do not need to use own time to learn professionally about investments and then managing the portfolio, they can delegate it to the management company of mutual fund. Moreover, there are tax benefits for shareholders of mutual funds. According to the Article 156 of Tax Code of the Republic of Kazakhstan individuals do not pay personal income tax on the dividends of mutual fund’s shares. Also the capital gain from mutual fund’s share (buyout) is not taxable. However, if an individual sells his or her share of mutual fund in the secondary market, the capital gain from the transaction is taxable at the rate of 10% (individual income tax) [4, 5].

On the other hand, when shareholders of mutual funds sell (redeem) shares, and the value of these shares decrease, then shareholders have a loss. Therefore, as the market value of mutual funds’ holding securities fluctuates greatly, the value of shares will too, and investments in mutual funds can be risky. Management companies do not guarantee any minimum return to shareholders. However, through increase in the level of financial literacy people (individual investors) will realize the riskiness of mutual funds, and in case of accepting the risk still will invest in them.

Mutual funds play an important role in the financial system of each country. Management Company of a mutual fund needs to invest money in some financial instruments. So, by providing favorable environment for mutual funds management companies can become active participants in the stock exchange market of Kazakhstan and as a result, develop the market. Consequently, through investing in stocks and bonds of Kazakhstani issuers, management companies of mutual funds provide additional investments to them, so in general they contribute to the economical development of Kazakhstan.

In addition, mutual funds are alternative investment tools for people. So, they can be useful for Kazakhstani people, since they widen the choice of investments besides the most spread tool as deposits at banks.

To sum up, the development of mutual funds as an institutional investor makes a valuable contribution to development of domestic financial market. Taking into account the importance of the latter result for Kazakhstan (especially development of stock exchange market), it can be expected that benefits provided by Government to investors in mutual funds will keep going in the future. Therefore, management companies will attract more funds to their mutual funds. In addition, management companies gained valuable experience of crisis, and after crisis only strongest ones keep operating. Thus, I strongly believe that the development of mutual funds in Kazakhstan will have a qualitative growth in the future (increase in types of mutual funds available for investors, better performance of management companies, more asset types in the portfolio of mutual funds).

Literature:

1 Hall A.D. Getting started in mutual funds, 2 ed. - John Wiley and Sons, 2010. – 272 p.

2 Закон Республики Казахстан N 576-2 «Об инвестиционных фондах» от 07.07.2004.

3 Official site of Agency of the Republic of Kazakhstan on regulation and supervision of financial market and financial organizations - www.afn.kz

4 Bodie Z., Kane A., Marcus A. Investments, 5 ed. – McGraw-Hill, 2008. – 1054 p.

5 Налоговый Кодекс Республики Казахстан, 2011.