AN ALTERNATIVE FOR INVESTMENT

Despite the considerable development of Azerbaijan's banking sector in recent years, the population's interest in keeping "extra" income in bank deposits remains at an unsatisfactory level. For example, only a quarter (9.4bn manats) of the 37.6bn manats of income received last year was used by citizens to increase their bank deposits and capital. This situation raises a number of problems, including, specifically, the need to introduce new alternative vehicles for accumulating people's funds.

"In the footsteps" of Europe and the USA 

Because of the restriction on the amount of insurable deposits (the Azerbaijani Deposit Insurance Fund - ADIF - insures bank deposits for a sum not exceeding 30,000 manats) individuals with relatively large capital have to make several deposits or seek alternative investment vehicles. At the same time, as Samir Aliyev, an expert of the "Promoting Economic Initiatives" public association pointed out to R+, there are not that many of these among the population: "At the moment there are two investment vehicles that are popular with the public. In the first case they deposit their funds in banks. The second vehicle is to acquire real estate which is also lucrative in a country like Azerbaijan."

Meanwhile, there are various vehicles of investment for households in the developed countries, including mutual investment funds (MIF). The property of the fund is accumulated from investors' funds and managed by a specialized company on the basis of a relationship of trust. A mutual investment fund is created without forming a legal body and each investor has a certain number of shares.

The most widespread among investment funds in the USA are the so-called management companies. These are joint-stock companies in which money may be invested after buying their shares. The shareholder receives an income in the form of dividends from the increase in value of these shares. Management companies are split into open-ended investment companies, or mutual funds, and closed-ended investment companies, or closed-type trusts. Of all the types of investment companies, the most popular - 93.3 per cent - are the mutual funds.

In Europe, the activities of investment funds are determined by the nature of the region. A concept called UCITS (Undertaking for Collective Investment in Transferable Securities) was introduced in the countries of the European Union.  According to this document, UCITS handles demands regarding the public procurement of investment resources, observation of the principle of risk diversification and the purchase of securities of the fund at the demand of investors. That said, the legal form of the investment fund may be both contractual and trust, or corporative. Therefore, essentially, UCITS strongly resembles US mutual funds, or MIFs. The proportion of UCITS assets to the assets of all the investment funds of the European Union countries is currently about 80 per cent.

Azerbaijan is also following "in the footsteps" of Europe and the USA, Samir Aliyev says. "The country's economy is developing rapidly, as a result of which the population have more ready assets. In this connection, households need alternative vehicles of investment, including MIFs. On the one hand, MIFs will be able to attract funds "stashed away" by the population, and on the other, they can provide more effective circulation of money in the country's economy. Apart from this, MIFs will boost the development of the securities market in Azerbaijan," S. Aliyev concluded.

Minimum risk, maximum opportunity

The first MIFs will soon be created in Azerbaijan. Cavid Nazarov, the head of the licensing and control department of the Azerbaijani State Securities Commission (ASSC), told R+ that the legal basis for their activity was formed by a law of 22 October 2010, which defines the legal and economic basis for state supervision and regulation of the activities of investment funds, as well as the rules of their organization, administration and abolishment. Besides this, a number of statutory documents are in force on the demands of accountability of investment funds, capital formation, combating the funding of terrorism and money-laundering and demands on foreign auditors.

According to Azerbaijani law, investment funds are divided into joint-stock and mutual investment. "In turn MIFs are created in open, interval and closed form. That said, the scope of investment of the MIFs is quite broad. It is a requirement of the law that open and interval investment funds cannot invest in real estate, whereas closed MIFs may invest in bank deposits, state and municipal securities, corporative securities and real estate, and also in the shares of legal persons in authorized capital," Nazarov said.

At the same time, he said, the law poses no restrictions on the size of investments for investment funds. "But certain requirements are provided in order to avert risks for the structure of assets owned by mutual investment funds. They are aimed at providing financial stability and ensuring the correct activity of funds. For example, the ratio of depositors lodged in one credit organization must not exceed 25 per cent of all the fund's assets, or monetary resources must not exceed 30 per cent of all the fund's assets. These measures should not be regarded as restrictive activity of the fund. They are designed to insure against risks in the fund's activities," Nazarov said.

The rate of return of investment funds varies depending on the sphere of their activity and risks. "The lesser the degree of risk the lesser the return. At the same time, those chasing high returns must expect greater risks. But risks must be calculated and the proper measures taken to correct them," the ASSC's spokesman noted.

To create a joint-stock investment fund and also manage investment fund assets in Azerbaijan one must have a licence (MIFs must be state registered), and certain arrangements have to be made. An application to set up a joint-stock investment fund is made in two stages, and in general this process takes about four months.

According to the ASSC's predictions, the creation of mutual investment funds will have a positive effect on the country's economy, including the development of the securities market because, as Nazarov pointed out, these funds will contribute to the strengthening of the diversification of the country's economy and also direct the flow of finance to various sectors. Besides this, the MIFs will give the population an incentive to use different sources of investment.

And so, with the launching and full-fledged development of MIFs, ordinary citizens, even those with small savings, will able to become shareholders in major high-income companies and buy shares which many people could not afford to do alone. 

THE HISTORY OF MIF

Mutual Investment Funds date back to the 19th century. The first investment funds were founded in Belgium in 1822, in Switzerland in 1849 and in France in 1852. The first investment fund in the USA was founded in 1860 - a corporative investment fund.

The investment fund industry in the USA and Europe really took off after the Second World War. By the end of the 20th century they had begun to play a special role in the economy of the developed countries and became a basic entity for the investment of household savings. Most investment fund shares in the world are now open-ended.