Understanding Mutual Funds in Nepal: A Guide to Benefits, Risks, and Performance

According to Investopedia, a mutual fund is a professionally managed pool of money collected from investors to invest in securities. Securities mean investment assets like stocks, bonds, money market instruments, etc.

In Nepal, there are a total of 37 closed-end mutual funds and 7 open-end mutual funds as of April 2024. They are all managed by different commercial banks in Nepal. More specifically, such funds are managed by the investment banking subsidiary of each commercial bank. For instance, the funds promoted by Nabil Bank are actually managed by Nabil Invest.

Are Mutual Funds a Safe Investment in Nepal?

Theoretically, mutual funds are managed by fund managers who have years of experience in the financial markets. However, no expert or finance geek can accurately predict the securities market. Since the stock market is guided by investor psychology, greed, and fear, it is simply impossible to predict accurately at all times.

As a result, if we look at the performance of mutual funds in Nepal, we see that they tend to gain when NEPSE itself is in an uptrend. Likewise, mutual funds lose money when the overall market is in a downtrend.

However, what you should know is that mutual funds do not invest only in stocks. Since they have the responsibility to preserve the money invested by the general public, they must put a portion of their fund in fixed deposits, bonds, and debentures. These alternative investment assets are considered safer than stocks.

Thus, mutual funds play a role in smoothing out the uncertainties in the market. What this means is that even if the stock market and overall economy are declining, mutual funds have a slightly lesser amount of loss. However, since the fund managers cannot invest aggressively in risky assets, mutual funds also give a lesser amount of profit when the market is gaining.

Should You Invest in Mutual Funds?

If you have not learned the skills of investing but want to reap the benefits from investing, you can invest in mutual funds. Once you put the money in, the fund managers will invest according to their strategy and hopefully give you a profit.

Also, if you are new to the stock market but want to get serious about investing, you can simply invest in a mutual fund to test the waters. If you fall into this category, I suggest you also invest a tiny sum in stocks themselves. If you invest, you are either going to lose some or gain some. But you will rarely be in the position where you are right now.

Change is the new constant. This is what I personally like about the stock market. Even if you do not know anything about stocks and IPOs, you will either gain or lose. Simple. Just invest a bit and keep learning. Keep failing AND keep learning.

List of Mutual Funds Currently in Operation in Nepal:

Closed-End Mutual Funds

Open-End Mutual Funds

More on https://www.sharesansar.com/mutual-fund-navs

Well, how do mutual funds distribute their profit?

The world of investing is very neat and tidy. Say, for example, a mutual fund wants to manage (invest) Rs. 1 Arba. The mutual fund issues an IPO to the general public to raise this sum of money.

Now, let’s say you want to invest only Rs. 2,000. It is perfectly okay. Hundreds of investors who invest tiny sums of money will eventually raise Rs. 1 Arba. Since each unit of stock (called kitta in Nepali) costs Rs. 10, you will be given a total of 200 units of the mutual fund for the Rs. 2,000 that you invest.

There is a very clever reason behind this division of the company’s investment capital in units. I’ll explain the reason in just a minute.

Now, after one year, if the mutual fund decides to distribute the profit from its earnings, it will give a dividend. For instance, if the fund decides to distribute a 20% cash dividend, the dividend will be distributed proportionately among investors. For instance, since you invested Rs. 2,000, you are going to get 20% of your investment amount.

Basic math here. You will get Rs. 400. No big deal. Someone who invested Rs. 3,00,000 will get Rs. 60,000.

Advantages and Disadvantages of Investing in Mutual Funds in Nepal

Advantages:

1) Managed by experienced fund managers. Although they are not perfect, they are certainly better-informed than a newbie who knows nothing.
2) Gives better returns than depositing money in a bank account. The dividend is generally higher than the interest rate on savings. However, understand there is a certain level of risk involved. Your money is safer in a bank account.
3) Teaches a lot of lessons for those who want to enter the stock market. Useful for testing the water.
4) The par value (cost price) of each unit is very low, i.e. Rs. 10. Thus, you can invest in mutual funds with a small amount of capital.
5) Mutual Funds are legally required to reduce risk by investing in a diverse set of assets. Thus, they help to minimize the losses in a down-trending market. Inexperienced people who directly enter the stock market may lose heavily at such times.

Disadvantages:

1) Because mutual funds can’t invest with aggressive (but potentially rewarding) strategies, they can’t fully capitalize on a bull market. Thus, investing in top NEPSE companies gives higher profit than in mutual funds.
2) If you have learned an investment strategy, it is wise to invest on your own. This is because, for the same amount of market gains, mutual funds give lesser returns. They have to take money away for office expenses, staff salaries, etc.
3) If you ask some investors in Nepal, they’ll tell you that mutual funds are just a way for banks to give huge salaries to the “expert” fund managers. This is because the performance of mutual funds in Nepal is less than satisfactory.
4) As an individual investor, we can invest more during bullish times and stay on cash during bearish cycles or trend reversals. However, mutual funds have to stay invested at all times. Thus, they cannot avoid market downtrends like an individual investor.

Thanks to Samin Gurung for the well-researched article.