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Promoting transparency in the investment management industry
It is crucial for investors to be fully aware that the approval they give exposes them to various risks related to the transactions they approve, including liquidity risk and credit risk.
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Mutual funds are official investment products supervised by the Financial Services Authority (OJK). (Shutterstock/JohnKwan)
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utual funds are popular among the investing public because they are perceived to be profitable and safe choices. However, previous regulations did not adequately address strategic issues in line with the needs and developments of the capital market. This was revealed in the explanation of the latest Financial Services Authority (OJK) regulations in 2023 concerning mutual funds in the form of collective investment contracts.
According to data published by the OJK’s Investment Management Industry Information Center, mutual funds accounted for the largest portion of assets under management (AUM) in the investment management industry as of June 27. The value of mutual funds was recorded at approximately Rp 511.5 trillion (US$34.1 billion) out of a total AUM of around Rp 824 trillion.
Meanwhile, based on the Indonesian capital market development target as outlined in the Indonesia Capital Market Roadmap 2023-2027, the total value of funds managed by the industry is expected to reach Rp 1 quadrillion. Various efforts, including regulatory changes, are still required to achieve these targets.
The new OJK regulation introduces several new concepts, such as mutual fund settlement through “in-kind redemption” and the application standards for “share class”. In addition, it also regulates the calculation of net asset value for foreign securities-based mutual funds and electronic payment systems in the form of virtual accounts.
These concepts must be properly observed to fully benefit investors and take advantage of the adjustments and opportunities created. For instance, the provisions regarding the investment managers' application of in-kind redemption or buyback with an asset handover mechanism.
According to the applicable regulations, investment managers on behalf of open-ended mutual funds in the form of collective investment contracts are required to buy back participation units sold by unit holders. The concept of “in-kind redemption” in the buyback process provides more flexibility for investment managers in fulfilling their obligations. It alleviates the pressure on them to sell assets in the portfolio, thereby protecting the value of mutual fund portfolios from market risks.
This mechanism is particularly beneficial in mitigating market risk, which arises when the market value of assets declines due to the forced sale of large quantities of assets to meet the high demand for the repurchase of participation units.
