Mutual Fund Investment Guide For Beginners In Nepal

Investing in mutual funds in Nepal is a great way to get exposure to the stock market while minimising risk. Mutual funds are a type of investment vehicle that pools money from many investors, which is then managed by a professional fund manager. The fund manager collects money from a large number of investors and invests the funds in a diversified portfolio of equities, bonds, and fixed-income securities. In Nepal, mutual funds are governed by the Mutual Fund Regulations, 2067(2010 A.D.) and the Mutual Fund Directive, 2069(2012 A.D.). There are two main types of mutual funds in Nepal: open-ended and closed-ended. Open-ended funds are available for subscription all year round and are not listed on stock exchanges, while closed-ended funds have a fixed number of shares and a fixed duration.

How to buy mutual fund shares on the Nepal Stock Exchange

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

• Purchase from the secondary market (Nepal Stock Exchange)
• Purchase an open-ended scheme directly from the fund manager
• Purchase upcoming mutual fund schemes at a public offering
• Purchase from the secondary market (Nepal Stock Exchange)

There are currently 19 mutual fund schemes listed and traded on the Nepal Stock Exchange (NEPSE). You can purchase shares of these mutual fund schemes in the same way you would buy shares of any other company—through stockbrokers.

Purchase an open-ended scheme directly from the fund manager

You can also purchase open-ended mutual fund schemes, which are not traded on the stock exchange. One can directly purchase or sell shares of such schemes from or to the fund manager. The purchase/sale price is based on the Net Asset Value (NAV) of the scheme.

In Nepal, NIBL Ace Capital Limited is operating the country's first open-ended mutual fund scheme, called the 'NIBL Sahabhagita Fund'. You can contact NIBL Ace Capital for purchasing units in this scheme.

Purchase upcoming mutual fund schemes at a public offering

If you do not want to purchase from the stock exchange or currently available open-ended schemes, you can wait for new mutual fund schemes that will come in the form of public offerings. The fund manager will issue new schemes to the public at a price of Rs 10 per unit, similar to an IPO for mutual funds.

How to buy open-ended mutual fund shares directly from the fund manager

Open-ended mutual funds in Nepal have no fixed maturity date, and investors can buy or sell them at any time. However, investors can only purchase open-ended mutual funds directly from the fund issuer, not from other shareholders. This means that investors must buy and sell open-ended mutual funds from the fund manager/issuer, not on the NEPSE stock market.

To buy open-ended mutual fund shares directly from the fund manager, investors can visit the office of the fund manager or go to the distribution outlets provided by the fund manager. The shares are priced at the Net Asset Value (NAV) calculated at the end of the previous day. The NAV of a share is generally updated daily on the fund's website.

The first step in the process of buying open-ended mutual funds is the New Fund Offer (NFO). After the NFO closes, shares are allotted to individual investors. Following the allotment, the shares can be traded at the distribution outlets based on the NAV computed daily.

It is important to note that investors may have to bear an exit load when selling their units. An exit load is a fee charged to an investor for exiting a scheme, typically within 12 or 24 months of purchasing.

How to buy upcoming mutual fund shares at a public offering

There are three main ways to buy mutual fund schemes in Nepal: purchasing from the secondary market (Nepal Stock Exchange), purchasing an open-ended scheme directly from the fund manager, and purchasing upcoming mutual fund schemes at a public offering.

Upcoming mutual fund schemes will be offered to the public at a price of Rs 10 per unit. This is similar to an IPO for mutual funds, and is known as a New Fund Offering (NFO). An NFO is a new fund, typically a mutual fund scheme, that is first made available for investment to investors. The fund manager will aim to build an ideal portfolio based on the fund's investment objectives.

There are three types of NFO: open-ended, close-ended, and exchange-traded funds. Open-ended NFOs do not restrict the number of shares that can be issued, and investors can make subsequent purchases and redemption requests at any time. Close-ended NFOs restrict the number of shares issued to a specified number, and investors can only enter the fund when the NFO is live. Exchange-traded funds are a type of mutual fund that tracks the performance of a specific index, such as the NIFTY 50.

When considering an NFO, it is important to research the reputation and goodwill of the Asset Management Company (AMC), the fund's objectives, and the expected returns. NFOs are popular as they can provide significant gains and excellent diversification. They are also cheaper than other funds, offering higher potential returns.

How to choose between closed-end and open-end mutual funds

In Nepal, there are two types of mutual funds: open-end and closed-end. Here's how to choose between the two:

Closed-End Mutual Funds

Closed-end funds have a fixed number of shares offered by an investment company through an initial public offering (IPO). After the IPO, the shares are listed on a stock exchange and traded like any other stock. Closed-end funds have a fixed duration, usually ranging from 3 to 15 years. They raise a fixed amount of capital through the IPO, and once the funds are raised, they cannot take on new capital. Closed-end funds are priced according to market values, which means they can be bought or sold at the price the fund is trading at during the day. Demand drives share prices, so closed-end funds typically sell at a premium or discount to their net asset value (NAV). Closed-end funds are more likely to include alternative investments in their portfolios, such as futures, derivatives, or foreign currency. An example of a closed-end fund is a municipal bond fund, which invests in local and state government debt to minimize risk.

Open-End Mutual Funds

Open-end funds, on the other hand, do not have a fixed number of shares and are offered through a fund company that sells shares directly to investors. There is no limit to how many shares an open-end fund can offer, and new shares are created whenever an investor buys them. Open-end funds are priced only once per day, at the end of each trading day, based on the net asset value (NAV) of the shares. This is the only price at which fund shares can be purchased that day. Open-end funds are highly liquid, as investors can conveniently buy and sell shares at the distribution outlets. However, investors may have to pay an exit load when selling their units. Open-end funds are perpetual in nature and do not have a fixed maturity date.

Choosing Between Closed-End and Open-End Mutual Funds

When choosing between closed-end and open-end mutual funds in Nepal, investors should consider their investment goals, risk tolerance, and liquidity needs. Closed-end funds may be more suitable for those seeking a fixed investment period and a more diverse portfolio, including alternative investments. On the other hand, open-end funds offer higher liquidity and flexibility, as investors can buy and sell shares at any time. Additionally, open-end funds may be more suitable for long-term investments, as they do not have a fixed maturity date. It is important to carefully review the fund's prospectus, investment objectives, and associated risks before making an investment decision.

How to set up a Systematic Investment Plan (SIP)

Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds in Nepal. They offer investors the flexibility to enter the market gradually and diversify their portfolios. Here is a step-by-step guide on how to set up an SIP in Nepal:

Step 1: Understand the Basics of SIP

Before setting up an SIP, it is important to understand what it is and how it works. An SIP is a method of investing in mutual funds where an investor chooses a mutual fund scheme and invests a fixed amount at fixed intervals. This is done through regular, equal payments, which can be made monthly, quarterly, semi-annually, or annually. The advantage of this approach is that it allows investors to invest smaller amounts regularly without the burden of a large one-time investment.

Step 2: Choose a Suitable Mutual Fund

When setting up an SIP, the first step is to select a suitable mutual fund scheme that aligns with your financial goals and risk tolerance. In Nepal, there are several SIP-oriented mutual funds offered by companies such as NIBL Sahabhagita Fund, NIMB Ace Capital Limited, and Siddhartha Systematic Investment Scheme (SSIS). Research and compare the different funds' performance, fees, and investment strategies before making a decision.

Step 3: Open a Demat Account

To invest in mutual funds in Nepal, you will need to have a Demat account with a bank. A Demat account is a type of account that holds financial securities in electronic format, and it is required to facilitate the buying and selling of mutual fund units. You can open a Demat account with any bank in Nepal that offers this service.

Step 4: Choose an Investment Management Agency

After selecting the mutual fund, the next step is to choose a reliable and experienced investment management agency to facilitate your SIP investments. Look for agencies with a proven track record and expertise in the field. The agency will help you navigate the investment process and provide ongoing support.

Step 5: Complete the Know Your Customer (KYC) Process

Once you have chosen an investment management agency, you will need to complete the Know Your Customer (KYC) process. This is a standard procedure to verify your identity and ensure compliance with regulatory requirements. The KYC process may involve providing documents such as proof of identity, proof of address, and other relevant information.

Step 6: Start Investing in the SIP

After completing the necessary steps, you can start investing in the SIP. Set up a regular, fixed amount to be invested in the mutual fund of your choice through any digital wallet. The amount will be automatically debited from your bank account and invested in the mutual fund at the predetermined time intervals. You can also use an SIP calculator to estimate the potential returns on your investments based on factors such as investment amount, time period, and expected rate of return.

Step 7: Monitor and Review Your Investments

Once your SIP investments are in place, it is important to regularly monitor and review your portfolio. Keep track of the performance of the mutual fund and the overall market conditions. Depending on your financial goals and risk tolerance, you may need to make adjustments to your investment strategy over time.

Frequently asked questions