Azerbaijani have got significantly big amount of money in the last years. Till recently the real estate was an only highly liquid tool to invest them. Experts' assertions about heating in this field now make less people to place their savings in banks.
Potential of savings in Azerbaijan are well seen in the following macroeconomic indices: the GDP increased by 5 times, per capita GDP by 1.7 times, community savings in banks by 9.3 times in 2003-2006. Despite ongoing global financial crisis over the past few years, savings at the Azerbaijani banks rose by 32.6 percent at the beginning of May.
Meanwhile, Mutual Funds can be quite profitable alternative to place funds, because these financial institutes enable to preserve a balance between risk and profitability.
The Mutual Fund is a form of collective investing. The fund is established on the basis of funds of many depositors and is given to an asset management of a company. Shareholders here own Mutual Fund's property, which they hold on the right of common share property. Share implies securities, certifying its owner with a right of share in the fund's property. The share has its value, determined by a managing company on the basis of total cost of assets comprising the fund. Share is not deposit and investors at Mutual Fund's will not receive fixed interests. Profitability of this type of investments depends on growth rate of share prices, which changes by times. So, the cost of share is not as representative as its dynamic of fluctuation.
The modern mutual fund was first introduced in Belgium in 1822. Mutual funds became popular in the United States in the 1920s and now 40 percent of people are shareholders. There are 50,000 investment funds worldwide with aggregate assets of $14 trillion.
A mutual fund is a managed group of owned securities of several corporations. These corporations receive dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors purchase shares in the mutual fund as if it was an individual security. After paying operating costs, the earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion to the amount of money invested. Investors hope that a loss on one holding will be made up by a gain on another.
A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; it may be considered as a fluid capital stock. The number of shares changes as investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time for a market price. However the open-end market price is influenced greatly by the fund managers. On the other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with the market. But with close-end funds, the fund manager has less influence because the price of the underlining owned securities has greater influence.
The law on investment funds, dated 1999, regulates the activities of the investment funds in Azerbaijan, whilst no Mutual Fund has been established so far. The key reason was that this legislation provided for the establishment of joint-stock funds. The experience shows that investment funds established over the past few years, and overall funds functioning worldwide were created not in the form of legal and joint stock companies, but on the basis of funds of investors and are managed by managers.
A step towards regional financial center
Azerbaijan Parliament's committee on economic policy made a proposal to establish model of economic dynamics of investment funds in Azerbaijan.
The new law envisages establishing joint-stock share funds, as well as open and closed share funds with an interval share.
The joint-stock investment funds allow participation of any person and the acquisition of significant share (10 percent and over) in the authorized capital, including increasing their share to 20 or 33 percent of the authorized capital, bringing to 50 percent in the management.
Activities of investment funds will be licensed State Securities Committee. The agency regulating the activities of investment funds will be their state register.
Unregulated operations of investment funds are one of the factors that gave impetus the world processes. From this point of view, the draft law on investment funds has been corrected, considering world's best practices.
For instance, the first SIF in Kazakhstan was established in 2005. However, after a year, in 2006, 87 funds began functioning in Kazakhstan, accumulating roughly $400 million. It means this market grew 4 times only within a year. Furthermore, the lion share of growth accounted for closed type of funds, created under the separate projects.
Establishment of investment funds in Azerbaijan will accelerate the country's turning to a regional financial center in Central Asia and Caucasus, believes Rufat Aslanly, Chairman of the State Securities Community,
Azerbaijan has the political and socio-economic opportunities to become a financial center of Central Asia and the Caucasus, Azerbaijani State Securities Committee Head Rufat Aslanli said.
"The current situation allows the country to consider such a strategy, but it is not designed for the short term," Aslanli said. "The Azerbaijani market observes strong interest by foreign investors and the financial markets in neighboring countries."
He said such an increased interest is linked with stability and sustainability of the Azerbaijani economy, including the financial sector in the disasters occurring in the world markets. In addition, all international organizations confirm that the stability of Azerbaijan's economy in the current global situation is explained by the efficiency and pragmatism of the pursued policy of macroeconomic management in general and financial sector regulation.
"We can take advantage of these chances to turn into a financial center of the region," Aslanli said.
Minimum risk
Azerbaijan intends to introduce restrictions in the structure of investments funds' assets, which will be placed in foreign markets in an effort to minimize risks of investment funds. Their structure of assets will be included in specially developed legislative documents, which will specify requirements on their diversification out of Azerbaijan. However, the requirements do not mean restricting investment flow from one market to another.
In accordance with the bill on Investment funds, the funds can place their funds in different financial assets - shares, loan instruments with fixed income. Banks are major part of investors in the market.
New tools will appear in the market following appearance of investment funds, which will enable to expand supply at stock market. Transactions are carried out with both state and corporate securities, whilst share of state securities exceeds 80 percent."
Though special weight of securities dropped from 90 percent to 80 percent at the stock markets, the overwhelming share of transactions is held with securities of the state sector.
SIFs will be turned to huge institutional investors through attracting small investments. Such opportunities enable the companies and corporations in needs of big investments to enter the market.
Respectively, it will be great stimuli not only for efficient activities of the stock market, but also give birth to big investors.
Conclusion
Establishing investments funds becomes more topical amid a policy held the banking sectors to decrease interests on deposits and activity in the real estate market.
Insurance companies and pension funds, which prefer confidential management, are of much interest recently in other countries where SIFs exit. Furthermore, managers are unwilling to focus on institutional investors, fearing to lose real investors - individuals. According to specialists, namely they will become a major factor of successful development in the market in future.
To stimulate the SIFs in the country the government should take care of lax taxation in their activities to promote profitability of SIFs (even to 70 percent per annum). The international tax privileges allow releasing from tax the income from investing. Tax-free mode can be applied on dividends which the fund will distribute among shareholders.