The plan is part of the government's drive to restore calm to the market, whose sharp fall has triggered angry protests by investors in the capital Dhaka and cities and towns across the country.

Eight state-run financial institutions will invest cash to create the planned 50 billion taka ($700 million) Bangladesh Fund, said M. Fayequzzaman, chief executive officer of Investment Corp of Bangladesh.

"It is the largest ever mutual fund in the country's history. It is aimed at stabilising the country's stock exchange and boosting liquidity in the crisis-hit market," Fayequzzaman told AFP.

The Dhaka Stock Exchange has shed more than 40 percent in the last three months, wiping over $16 billion off the share market's capitalisation since its benchmark index hit a record high of 8,918.51 points on December 5.

Tens of thousands of small investors have been worst hit as they started buying shares when prices were peaking.

The benchmark DGEN index was trading up 2.90 percent, or 160 points, at 5,697 points in morning trade on the back of Sunday's announcement of the fund's creation.

Monday's gains came on top of a 1.99 percent rise in the index on Sunday, a trading day in mainly Muslim Bangladesh.

The fund comes on top of a reform package that includes tighter regulation and other measures announced earlier by the government to prop up the market and boost investor confidence.

Anxious to assuage investor anger, the government has also ordered a probe into the fall.

The Dhaka Stock Exchange has been one of the best performing markets in the world with the DGEN index climbing 400 percent between 2007 and 2010. In 2010, it soared 80 percent despite repeated warnings that the market was overheated.