RIYADH, 11 July 2005 — Mutual funds make saving and investing simple, accessible and affordable to small investors. In a mutual fund, investors do not buy shares of a company directly; instead, they buy shares of the mutual fund itself, which then pools the funds of all investors and invests them in stocks or bonds. The key benefit of a mutual fund is that by pooling together the funds of many investors, it allows small investors to buy shares that would be too expensive for them otherwise.
Thus, people can invest small amounts, the funds are managed professionally, and they are highly liquid. As institutional/portfolio managers, mutual funds also bring a high degree of professionalism, stability and fundamentals based trading in the stock market. Mutual funds have become increasingly important institutional investors in the Saudi stock market.
In fact, they are the only institutional investors in the Kingdom because there are no private pension funds and life insurance companies. In Saudi Arabia, currently only banks are allowed to operate mutual funds and, they have expanded their role greatly. In 1994, there were 61 mutual funds with 30,945 subscribers/shareholders and total assets of SR12 billion.
By the first quarter of 2004, there were 175 funds with 171,895 shareholders and assets totaling SR55 billion. (Total assets of mutual funds increased further to SR68 billion in the first quarter of 2005).
Saudi mutual funds are of two types: Those that invest in foreign securities and those that invest in local shares. In the past, Saudi mutual funds used to invest much of their assets overseas, but the situation has reversed dramatically from 2001. In 2000, about 57 percent of Saudi mutual fund assets were invested overseas. In 2001, this share fell to only 39 percent. The share of foreign funds has fallen further to 24 percent in the 1st quarter of 2005.
National Commercial Bank leads the pack in terms of total assets under management, followed by Riyad Bank, and Saudi British Bank. A number of issues related to mutual funds need to be sorted out in order for them to help further increase the Kingdom’s shareholder base and help small investors.
The average mutual fund shareholding is large (SR321,000 of assets) despite the fact that the typical minimum subscription allowed is SR5,000. Many mutual funds do not allow daily subscriptions and/or redemptions. And, very importantly, the most important role of mutual funds, i.e., diversification, cannot be accomplished when there are only 76 shares in the local stock market (and no local private sector debt securities).
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)