A Beginner's Guide To Mutual Fund Investment In Nepal

Investing in mutual funds is a great way to diversify your portfolio and minimise risk. In Nepal, mutual funds are a popular investment vehicle governed by The Mutual Fund Regulations, 2067(2010 A.D.) and The Mutual Fund Directive, 2069(2012 A.D.). These funds pool money from a large number of investors, which is then managed by professional fund managers who invest in a range of securities such as stocks, bonds, and fixed-income assets. The funds generate adequate returns at lower risks compared to direct investments in shares, making them an attractive option for investors who lack the time or knowledge to operate in the stock market. In this article, we will explore the different types of mutual funds available in Nepal, the benefits of investing in them, and the steps to invest in mutual funds in the country.

Open-ended vs. closed-ended funds

There are two types of mutual funds in Nepal: open-ended and closed-ended. Here's what you need to understand about these two types of funds before investing:

Open-ended funds

Open-ended mutual funds in Nepal have no limit on the number of shares offered, and they can be bought and sold on demand. These funds are available for subscription all year round and are not listed on the stock exchanges. Investors can buy or sell any part of their investment at any time, and the price is linked to the fund's Net Asset Value (NAV). The NAV per share is calculated at the end of each trading day, and shares are bought and sold directly at that NAV price. Open-ended funds are highly liquid, making them suitable for investors who want the flexibility to redeem their investment at any time.

Pros of open-ended funds:

• Higher liquidity as investors can redeem units at their convenience.
• Suitable for salaried and pension fund investors as they can decide to enter the fund at their choice and have long maturity.
• Optimal investment option for investors who want to use Systematic Investment Plans (SIPs).
• More secure as large cash reserves are maintained to meet shareholder redemptions.
• A performance track record is available, allowing investors to make well-informed decisions.

Cons of open-ended funds:

• Vulnerable to large inflows and outflows of cash, which can impact portfolio holders.
• Must maintain large cash reserves, which can lower yields.
• Higher management fees due to the need to continually adjust holdings.
• Investors may be influenced by market trends, leading to impulsive decisions.

Closed-ended funds

Closed-ended mutual funds, on the other hand, issue a fixed number of shares to the public through an Initial Public Offering (IPO). After the IPO, the shares are listed on the stock exchange, and investors can trade them like any other stock. The price an investor receives for their shares may differ significantly from the NAV, depending on market demand and supply. Closed-ended funds have a fixed maturity period, typically ranging from 3 to 15 years, after which investors can redeem their units.

Pros of closed-ended funds:

• Attractive and periodic distributions provide regular cash flow to investors.
• Stable asset structure as there is no pressure to constantly buy and redeem funds.
• Lower expenses due to minimal marketing and lower turnover.
• Higher returns compared to open-ended funds.
• Investors who missed out on the IPO can purchase the funds in the secondary market.

Cons of closed-ended funds:

• Volatile due to the impact of supply and demand on the NAV.
• Higher brokerage commissions for trading.
• No liquidity during the lock-in period; redemptions are only possible after the mandatory lock-in period ends.

How to buy mutual fund schemes

In Nepal, there are three main ways to buy mutual fund schemes:

Purchase from the Secondary Market (Nepal Stock Exchange)

At the time of writing, there are 19 mutual fund schemes listed and traded on the Nepal Stock Exchange (NEPSE). These mutual fund shares can be purchased like any other company's shares, through a stockbroker.

Purchase Open-Ended Schemes Directly from the Fund Manager

Open-ended mutual fund schemes are not traded on the stock exchange. Instead, one can directly purchase or sell shares from or to the fund manager. The purchase/sale price is based on the Net Asset Value (NAV) of the scheme, which indicates the underlying value of the mutual fund.

In Nepal, NIBL Ace Capital Limited offers an open-ended mutual fund scheme called 'NIBL Sahabhagita Fund'. Siddhartha Capital is also in the process of bringing an open-ended scheme called 'Siddhartha Systematic Investment Scheme'.

Purchase Upcoming Mutual Fund Schemes at Public Offering

If you don't want to purchase from the stock exchange or currently available open-ended schemes, you can wait for new mutual fund schemes that will be offered to the public. The fund manager will issue new schemes at a price of Rs 10 per unit, similar to an IPO for mutual funds.

• Sanima Large Cap Fund (Close Ended Scheme)
• Sanima Capital Limited
• Kumari Capital Limited
• NIC Asia Capital Limited
• Siddhartha Systematic Investment Scheme (Open End)
• NIC Asia Dynamic Debt Mutual Fund

Other Things to Know About Mutual Funds in Nepal

Mutual funds in Nepal are governed by the Mutual Fund Regulations, 2067(2010 A.D.) and the Mutual Fund Directive, 2069(2012 A.D.). Mutual funds pool investors' money and invest it in stocks, bonds, and other securities. Each investor owns units, which represent a portion of the fund's holdings. Mutual funds are managed by professional fund managers who create specific portfolios based on investment objectives.

Net Asset Value (NAV)

> NAV = (Fund Assets – Fund Liabilities) / Total shares outstanding

NAV is calculated daily, reflecting the closing prices of all securities in the fund's portfolio. This daily computation ensures that the NAV accurately represents the fund's value at the end of each trading day.

In the context of Nepal, the NAV of a mutual fund scheme is calculated by the mutual fund company and indicates the underlying value of the fund. It shows how much each investor would receive if the mutual fund portfolio was liquidated and all liabilities were paid off.

For example, as of October 4, 2024, the SEF Current NAV of Siddhartha Capital was 11.65.

NAV is a key indicator of a mutual fund's market value and performance. It can be used to track a fund's growth over time. It is also used for valuing and conducting the buying and selling of a fund's shares.

Benefits of mutual funds

Investing in mutual funds in Nepal offers a range of benefits to investors, especially those who are new to investing or have limited capital. Here are some of the key advantages:

Professional Management:

Mutual funds in Nepal are managed by expert fund managers who actively monitor the market and make wise investment decisions. They have the knowledge, analytical tools, and strategies to optimise the fund's portfolio and minimise risk, which is particularly beneficial for investors who don't have the time or expertise to navigate the complexities of the stock market.

Affordability and Accessibility:

Mutual funds are designed to be accessible to small investors with limited capital. In Nepal, mutual fund shares are typically priced at around 10 rupees, making it possible for people with modest means to invest in the stock market and become shareholders of reputable companies. Mutual funds also offer Systematic Investment Plans (SIPs), allowing investors to start with small monthly instalments of as little as Rs. 1000, promoting a disciplined approach to investing.

Diversification:

Mutual funds invest in a diversified portfolio of securities, including stocks, bonds, government securities, and fixed deposits. This diversification reduces risk by ensuring that losses in one security are offset by gains in others. It also allows investors, even those with small capital, to spread their investments across various sectors, providing them with a well-balanced portfolio that would otherwise be challenging to achieve individually.

Liquidity:

Mutual funds in Nepal offer high liquidity, providing investors with the flexibility to buy and sell their units. Open-end funds allow investors to sell their units back to the fund itself, while closed-end funds enable investors to trade their units on the stock exchange (NEPSE) like any other stock. This liquidity ensures that investors can access their money when needed without being locked into long-term commitments.

Low Transaction Costs:

Investing in mutual funds in Nepal incurs relatively low transaction costs. For closed-end funds traded on the stock exchange, the transaction costs are similar to regular share trading. For open-end funds, where investors deal directly with the fund manager, the costs may vary according to the fund manager's policies.

Safety:

Mutual funds in Nepal are highly regulated and diversified, reducing investment risk. Additionally, the Securities Board of Nepal (SEBON) provides oversight, monitoring the activities of fund managers and protecting investors from potential misconduct.

Overall, mutual funds offer a convenient, affordable, and relatively safe way for Nepalis to enter the world of investing, benefiting from the expertise of professional fund managers and the power of diversified portfolios.

Types of mutual funds

In Nepal, there are two main types of mutual funds: open-ended and closed-ended.

Open-Ended Mutual Funds

Open-ended funds are available for sale at any time and are not listed on the secondary market (Nepse). They can be bought and sold at any time based on their Net Asset Value (NAV). These funds can issue shares based on demand, and if investors want to sell their shares, the fund will buy them back. There is no need to purchase from existing shareholders. The shares of an open-ended fund are priced daily based on their day-to-day NAV.

In Nepal, NIBL Ace Capital Limited operates the country's first open-ended mutual fund scheme, the 'NIBL Sahabhagita Fund'. The fund issued 50 million units at a par value of Rs 10 on Jestha 19, 2076.

Closed-Ended Mutual Funds

Closed-ended funds usually issue a specified number of units for a fixed time period, generally between 3 to 15 years. These funds raise money through primary offerings to the general public and institutions. The funds are then listed and traded on the Nepal Stock Exchange (NEPSE). After the expiration of the stipulated time period, the investor gets back the profit, including the investment in the unit.

There are currently 19 closed-ended mutual fund schemes operating in Nepal, which have collectively gathered approximately Rs 26.09 billion from investors. Investors can purchase the units of these closed-end funds from the secondary market of Nepal (Nepse).

Frequently asked questions