A mutual fund is like a middleman in finance. It gathers money from different people who want to invest and uses that money to buy a mix of different investments, like stocks and bonds. The profits made, after subtracting expenses, are shared among all the investors. Think of it as a way for regular people to team up and invest in the stock market. The government of Nepal has a rule that 5% of the total initial public offerings (IPO) should go to mutual funds. Mutual funds are important in the securities market and offer various benefits.
History of Mutual Funds in Nepal
Mutual funds operate by
pooling funds from multiple investors, which are then used to acquire various
financial instruments such as stocks and bonds. This collective investment
approach provides investors with instant diversification, reducing overall risk.
The advent of the NCM mutual fund in 2050 B.S. marked a transformative moment
for the Nepali financial market, ushering in a new era of mutual funds.
Initially, it was an open-ended scheme with a modest fund of Rs. 100 million.
Nowadays, merchant bankers are introducing funds that are 5 to 10 times larger,
playing a pivotal role in the Nepalese financial landscape. NCM mutual fund
2050, the first mutual fund in Nepal, was established by NIDC Capital Market.
It started with units valued at Rs. 10 par and operated as an open-ended fund.
While it performed well initially, its fortunes waned in 2052 B.S., leading to
a transition into a closed-ended fund. The Citizen Unit Scheme (CUS), initiated
by Citizen Investment Trust (CIT) in 2052 B.S., was the second collective
investment scheme managed by CIT. It began as an open-ended scheme with units
priced at Rs. 100 each. The Security Board of Nepal (SEBON) serves as the
regulatory body overseeing mutual funds in Nepal and issued the Mutual Fund
Regulation, 2067, outlining terms, conditions, and criteria for fund sponsors,
managers, supervisors, and investments. In Nepal, merchant bankers, acting as
fund managers, operate mutual funds sponsored by 'A' class commercial banks
licensed by Nepal Rastra Bank. These mutual fund companies are exclusively
subsidiaries of commercial banks.
Present Context of Mutual Funds in Nepal
Right now, there are 42 mutual fund schemes active in the financial market of Nepal. Before they can release an offer letter and accept initial public offerings, these mutual funds need approval from SEBON. Once the fund units are assigned, they get listed on NEPSE. Out of the 42 schemes, 35 are close-ended, and 7 are open-ended. Interestingly, most people show more interest in close-ended schemes rather than open-ended ones. This preference is largely due to the perception that open-ended funds, especially those acquired during a bullish market phase, are experiencing a decline in their Net Asset Value (NAV).
The chart above displays all
7 open-ended schemes. What stands out is that only 2 of them are doing well in
keeping their Net Asset Values (NAVs) above their starting value of Rs. 10.
Even in a market downturn, KSLY (Kumari Sunaulo Lagani Yojana) and NADDF (Nic
Asia Dynamic Debt Fund) are holding strong with NAVs above Rs. 10. This
suggests that if NEPSE goes up in the future, these two mutual funds might
perform better than the other open-ended ones.
In the picture above, the
H80-20 close-ended scheme isn't on NEPSE yet. GIMES1, NEF, and NMBHF1 were
recently removed from NEPSE because they've matured. Now, among the remaining
35 close-ended schemes, only 13 are keeping their Net Asset Values (NAVs) above
their starting values. For folks looking to invest long-term, it's a good time
to grab mutual fund shares at a lower cost. C30MF seems like a top pick for
long-term investment since its NAV is higher than others, and it was listed
during a market downturn. The fund managers at C30MF seem skilled at buying
stocks at low prices and managing their funds wisely. Many other mutual funds
are also trading at discounted prices in the secondary market. Some savvy investors
buy mutual fund stocks shortly before they mature and make good returns in a
short time. After maturity, funds get delisted, and trading stops. Holders get
their money back within 3 months at the monthly NAV. Recently, NIBLPF seems to
have matured in just 2 months. When comparing mutual fund returns to fixed
deposit rates, only a few mutual funds can compete. Many Nepalese mutual fund
companies don't give dividends to holders, so it's important to understand the
company, the fund managers, and their past performance before investing.
In Nepal, mutual funds are a
new way for people to invest, and they're catching on fast. People like them
because experts manage the money, they help spread the risk by investing in
different things, it's cheaper to make transactions, everything is clear and
easy to understand, it doesn't cost a lot to get started, you can turn your
investment into cash easily, and it's convenient and flexible.
1.
**Professional Management:**
Most people don't have the know-how or big
bucks to navigate the stock market effectively. That's where mutual funds come
in handy. They have pros—experts with skills and experience—who study and pick
the best investments. This organized strategy is a luxury for individual
investors.
2.
**Portfolio Diversification:**
Putting all your money in one place can be
risky. Mutual funds spread your investment across different companies and
industries, lowering the chance of losing big. You don't invest directly in
companies; you invest in a mix, even with just Rs. 1000.
3.
**Reduction in Transaction Costs:**
Going solo in the stock market can be
pricey. Mutual funds, thanks to handling lots of money, can cut down on costs.
This makes it less expensive for investors compared to doing it all on their
own.
4.
**Liquidity:**
Selling stocks isn't always easy, but mutual
funds offer a way out. You can quickly turn your investment into cash by
selling your units back to the fund or on the stock exchange, depending on the
type of scheme.
5.
**Convenience:**
Mutual funds simplify the investment
process. Less paperwork, less time-consuming, and an easier way to get into the
investment game.
6.
**Transparency:**
Mutual funds are like an open book. They
follow strict rules and share all the details about what they own, how they're
doing, and what fees they charge. Tracking their performance is a breeze
through their NAV (Net Asset Value). Divide the total value of their assets
minus debts by the number of shares or units, and you've got it.
However,
there are some challenges when it comes to investing in mutual funds in Nepal.
Let's break them down:
1.
**Lack of Awareness:**
Many people in Nepal don't know about mutual
funds and the good things they can bring. One big reason is that there aren't
enough classes or training sessions by the experts, especially outside the
Kathmandu Valley.
2.
**Limited Investment Options:**
In Nepal, there aren't too many mutual funds
to choose from. Right now, there are 7 open-ended schemes and 35 close-ended
schemes.
3.
**High Fees:**
Mutual funds can be a bit expensive. This
cuts into what investors make overall. The fees are high because there are many
costs involved—things like load charges, management fees, 12B-1 fees,
transaction costs, accounting, and other miscellaneous costs.
4.
**Risks:**
As the saying goes, "Mutual Fund
investments are subject to market risks, read all scheme-related documents
carefully." The value of the funds can go up or down based on what's
happening in the market, like changes in interest rates. Just because a fund
did well in the past doesn't guarantee it'll do well in the future.
In conclusion,
mutual funds play a big role
in Nepal's financial world. Even though there are challenges, they can be a
helpful tool for folks in Nepal wanting to mix up their investments and reach
financial goals. Whether they're a good or not-so-good thing depends on the
investor and what they want to achieve. Before putting money in, it's crucial
for investors to think about the risks and rewards. Doing some research,
checking out past funds managed by fund managers, and understanding returns is
a smart move. When the market isn't doing so well, like in a bearish market,
it's a good idea for investors to adjust their mix of investments to match
their goals and how much risk they're comfortable with.
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