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HoSE puts up huge hurdles for small investors

The Ho Chi Minh Stock Exchange (HoSE) wants to raise the minimum trading lot from 100 shares to 1,000 to ease its overload.

Illustrative photo.

HoSE says the move is intended to better protect small individual investors as they will invest in Fund Certificates (FCs) issued by professional fund management companies. Yet it is just part of the puzzle picture. 

Which investment funds are meant for individuals?

There are different funds on the financial market, depending on their criteria. The funds include ETFs, mutual funds, retirement funds, closed-end funds, investment trusts, treasure stocks, share investment funds and stock index investment funds. The variety of investment funds can satisfy different needs of individual investors and institutions. But investments in FCs may not protect small investors and ease its overload as claimed.

First, several FCs are listed as shares, so they must be traded in lots. Portfolio funds are usually blue chip stocks often traded at high prices. They include ETF of Vanguard, specialized in technology shares, with its ETF prices currently ranging around US$350-370. Additionally, some funds require a minimum investment of US$500, US$ 5,000 or even tens of thousands of US dollars, making them inaccessible to small investors.

Second, FCs are also a kind of stock, so they are risky. And the risk levels do not only depend on the general factors of the market, but also of the fund management institutions. That is why investment funds have risk and performance indicators, like other stocks, from Alpha, Beta, Max Drawdown, R2, VaR to Sharpe ratio and Information ratio. Also, unlike shares or other securities, investors have to pay fund management costs when they invest in FCs, and this may sometimes be a maze for small investors. Some investment funds are not transparent in this issue. They do not make total costs clearly known to small investors.

Third, profits or investment performance figures are far beyond the investors' control since they give decision-making rights to the fund management companies. Therefore, individual investors should monitor the performance of investment funds for a certain period of time, usually between three and five years, taking into consideration all the risk indicators, performance indicators or risk-adjusted performance indicators. 

Prospects for investment funds in Vietnam?

According to the figures from Eikon (Thomson Reuteurs), there are currently 47 funds listed in Vietnam, with 19 funds over 5 years old, 29 funds over 3 years old and 41 over one year old. All those funds together make up just 7% of the listed stocks. However, the investment performance indicators of those funds vary considerably.

Over the past three years, the average rate of return of the funds listed in Vietnam was 4.5% per year, some funds had negative rates of return while one reached the highest 9 percent annual rate of return. Funds which have been listed for five years or more had their average 12 percent annual rate of return over the past five years, with at least one fund reporting its average 17.5 percent annual rate of return.

This indicates that investments in funds are exposed to risks at different levels. Moreover, the investors have additional actual costs deducted from their net profits. This is also the reason why investment funds in many markets compete against one another for not only rates of total returns, but also total costs, minimum investments, flexibility in management, transfer and liquidation of funds. In several developed markets, most market cap is held by people, because people also invest in mutual funds, ETF funds and retirement funds, apart from their direct investments in stocks. Those funds indirectly act on behalf of people and invest in the stock market.

Thus, to promote the development of professional investment fund sector, it is impossible to lead individual investors to switch from stocks to FCs, because they know how to work out their cost chances, let alone the fact that some investment funds do not need to be listed in the stock market. In developed markets, professional investment funds can actually grow thanks to the support from several policies, among which the personal income tax policy plays the pivotal role.

Several countries have additional retirement program called Defined Contribution, in which employees make a contribution to the voluntary retirement fund while the employers take care of the rest. The employee's payments are deducted from their personal base wages or salaries, with limits to the biggest deductions. Regarding the personal income tax, some life insurance funds operate a tax rate incentive scheme for people with investments in accredited FCs if they maintain their investments for a certain number of years. In France, for instance, the required period is at least four years, and people will be offered the highest benefits if they remain in the funds for eight years or more.

Next are transparency, market performance and regulations that securely protect individual investors. A study by D. Cumming, Sofia Johan, D. Li released in Journal of Financial Economics in 2011 with data of 42 stock markets, shows that strict regulations of the Stock Law can increase individual investors' trust, because they can control and limit problems such as market manipulation, insider trading and conflicts of interest of financial intermediaries. The Dodd-Frank Act of the United States of America and MiFID of the European Union prove that good supervision and management will promote the market development.

In brief, increasing the minimum trading lot from 100 shares to 1,000 is not actually meant to protect the interests of small individual investors since it intends to make them with their investments in stocks to FCs. Furthermore, the professional investment fund sector is only capable of making progress when it is supported by appropriate policies on personal income tax, stock Law and other legal regulations that can actually protect the interests of individual investors and pave the way for the growth of a transparent and efficient stock market.


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