Mutual Funds In Nepal

Mutual funds in Nepal are increasingly growing popular as a vehicle of investment. Currently, there are 27 mutual funds listed in Nepal (24 closed-ended and 3 open-ended mutual funds) with a few more in the pipeline.

Table Of Content

What are mutual funds?

Mutual funds pool money from many investors to invest in stocks, bonds, government securities,  and fixed deposits. The returns from the investments are distributed proportionately among the investors according to the number of units held. 

There are many benefits to using mutual funds:

  • They are easy to buy and easy to understand.
  • They provide diversification. Essentially, you own many different stocks, bonds, and government securities via the mutual fund, which reduces your risk. 
  • Professional fund managers manage them.
  • Investors can start investing in smaller amounts. The minimum is just Rs 1,000.  

Mutual funds in Nepal are regulated by the Securities Exchange Board of Nepal. They can only be issued, supervised and managed by entities/individuals fulfilling the criteria laid out in Mutual Fund Regulation, 2067 and as authorized by SEBON. 

What are the drawbacks of mutual funds?

Mutual funds can be a great investment vehicle, but they also have a few drawbacks. 

The professional management of the fund does not come cheap. In Nepal, fund managers usually charge 2-3% of the fund’s net asset value (NAV) as management fees. Also, costs for depository and supervisory fees are also added. Then there is the chance of management misuse, high turnover, churning affecting profitability.

Mutual funds in Nepal also tend to be heavily invested in the banking sector and financial institutions making them more exposed to these sectors. 

What are the different types of mutual funds in Nepal?

There are two types of mutual funds in Nepal: closed-end mutual funds and open-ended mutual funds.

Currently, there are only three open-ended mutual funds operating in Nepal. They are NIBL Sahabhagita Fund (Open Fund), NIC Asia Dynamic Debt Fund (Open Fund) and the newest entrant to the arena, Siddhartha Systematic Investment Scheme (Open Fund).

So, we’ll be focusing more on closed-end mutual funds from here on out. 

A point of note, mutual funds are usually named after their investment goal and philosophy. For example, an Equity Fund will primarily invest in equities (stocks). A Balanced Fund may seek to balance its risk profile by investing equally in government securities, fixed deposits, and the other half in equities. Then there are Growth Funds which seek to aggressively pursue capital growth by investing in securities with growth potential. Different fund types will have a different risk profile and return potential.  


What are closed-end mutual funds?

A closed-end mutual fund raises funds through an Initial Public Offering (IPO) by issuing units to investors. After the units are issued, the fund is closed – that is to say, no more new units are issued. The units are then listed on the stock market where investors can buy or sell the units.  The fund manager will then invest the raised funds and pay dividends to its investors from the investment.

Generally, mutual funds in Nepal issues units at Rs 10 per unit.

These closed-end mutual funds in Nepal usually have a maturity period between 5-10 years, with most recent mutual funds with a maturity period of 7 years.  At the end of this period, the fund is liquidated, and any profit or loss is distributed according to the number of units held known as a redemption amount per unit.

In contrast, open-ended mutual funds can accept new capital by issuing additional shares. They can only be bought or sold with the fund manager/firm directly. Whereas, closed-end mutual funds are bought and sold in the stock market (NEPSE) instead. 

ProsCons
Professional managementFund management fees
A diversified portfolioOnly available through stockbrokers after the initial IPO
Transparent pricingLess liquid than open-ended funds
Higher yield than open-ended fundsDiscounted prices in the market

How did closed-end mutual funds in Nepal perform?

Since its inception, there have been five closed-end mutual funds in Nepal which have reached their maturity. Let’s look at how each one performed.

1. Siddhartha Investment Growth Scheme-1 ( SIGS1 )
  • Fund Size: Rs 500 million
  • Maturity Period: 5 years
  • Matured: 12 December 2017
  • Fund Manager: Siddhartha Capital Limited
  • Redemption Amount Per Unit: Rs. 21.777
  • Total Dividend: 124.5% over 5 years

The SIGS1 mutual fund paid its investors an average dividend of 24.9% per annum. The fund paid 4.5% in its first year, 15% in its second and third year, 30% in its fourth year and a high 60% in its final and fifth year. 

At maturity, for an initial investment of Rs 10, you would have received Rs 21.777. So if you had invested Rs 10,000, you would have received Rs 21,777.

2. Laxmi Value Fund-1 (LVF1)
  • Fund Size: Rs 500 million
  • Maturity Period: 5 years
  • Matured: 25 March 2020
  • Fund Manager: Laxmi Capital Market Limited
  • Redemption Amount Per Unit: Rs 10
  • Total Dividend: 65% over 5 years

In its five-year operation, the Laxmi Value Fund-1 paid dividends three times; 25% in 2016, 25% in 2017 and 15% in 2019. The fund gave its investors an average dividend return of 13% per annum over five years.  

The units were redeemed at par.

3. NMB Sulav Investment Fund-1 (NMBSF1)
  • Fund Size: Rs 750 million
  • Maturity Period: 5 years
  • Matured: 20 October 2019
  • Fund Manager: NMB Capital Limited
  • Redemption Amount Per Unit: Rs 10.70
  • Total Dividend: 77.1% over 5 years

The fund paid its investors an average dividend of 15.42% p.a.  The fund didn’t pay a dividend in its first year of operation. 

4. Nabil Balanced Fund-1 ( NBF1 )
  • Fund Size: Rs. 750 million
  • Maturity Period: 5 years
  • Matured: 12 April 2018
  • Fund Manager: Nabil Capital Limited
  • Redemption Amount Per Unit: Rs 17.46 (Before Tax)
  • Total Dividend: 100% over 5 years

NBF1 paid its investors an average dividend of 20% p.a. The fund didn’t pay a dividend in its first year of operation, paid 14% in its second and third year, 30% in its fourth year and a solid 42% in its final year. 

The second-best performer in the list, it paid out is investors Rs. 17.46 (before tax) at redemption for each unit.

5. Siddhartha Equity Oriented Scheme (SEOS)
  • Fund Size: Rs. 1 billion
  • Maturity Period: 5 years
  • Matured: 22 July 2019
  • Fund Manager: Siddhartha Capital Limited
  • Redemption Amount Per Unit: Rs 11.497
  • Total Dividend: 53% over 5 years

The fund paid an average dividend of 10.6% per annum over five years. It paid out a dividend of 16% in its second year, 25% in its third year, and 12% in its fourth year for a total of 53%. The fund didn’t pay a dividend in its first or last year of operation. 

The units were redeemed at a profit of 14.97% not counting the dividend paid.

Current mutual funds in Nepal

As of July 2021, 24 closed-end and 3 open-end mutual funds operate in Nepal. They are:

  • Citizens Mutual Fund-1 (CMF)
  • Citizens Mutual Fund – 2 (CMF2)
  • Global IME Samunnat Scheme 1 (GIMES1)
  • Laxmi Equity Fund (LEMF)
  • Laxmi Unnati Kosh (LUK)
  • Nabil Equity Fund (NEF)
  • Nabil Balanced Fund – 2 (NBF2)
  • NIBL Pragati Fund (NIBLPF)
  • NIBL Samriddhi Fund 1 (NIBLSF1)
  • NIC ASIA Balanced Fund (NICBF)
  • NIC Asia Growth Fund (NICGF)
  • NMB 50 (NMB50)
  • NMB Hybrid Fund L- 1 (NMBHF1)
  • Sanima Equity Fund (SAEF) 
  • Siddhartha Equity Fund (SEF)
  • Sunrise First Mutual Fund (SFMF)
  • Siddhartha Investment Growth Scheme-2 (SIGS2)
  • Sanima Large Cap Fund
  • NIC ASIA Balanced Fund
  • Sunrise First Mutual Fund
  • Kumari Equity Fund
  • Sunrise Bluechip Fund
  • NIBL Samriddhi Fund – 2
  • NIC Asia Select-30 (Index Fund)
  • RBB Mutual Fund 1
  • NIBL Sahabhagita Fund (Open Fund)
  • NIC Asia Dynamic Debt Fund (Open Fund)
  • Siddhartha Systematic Investment Scheme (Open Fund)

How to invest in closed-end mutual funds?

There are two ways you can invest in closed-end mutual funds

  • Initial Public Offering (IPO)
  • Nepal Stock Exchange (NEPSE)
Initial Public Offering (IPO)

Just like regular stocks, mutual funds also announce an IPO in the newspapers. The fund managers put out a prospectus detailing their plans on how and where they plan to invest, management fees, maturity date etc.

You can apply for mutual fund IPOs the same way you would a normal stock IPO; online via Meroshare (online) or by filling out a physical form at the fund managers.

Generally, investors can buy each unit for Rs 10 and apply for a minimum of 10 units (Rs 1,000).

Nepal Stock Exchange (Secondary market)

Once the IPO is finished, the shares are then listed on the secondary market (NEPSE). You’ll need to go to a stockbroker and open a broker trading account to buy or sell in the secondary market.

The price is determined by the market and the net asset value (NAV) of the fund.

Please note that all mutual funds are subject to market risk. If you’re risk-averse, term deposits like fixed deposits may be the better option.


What are open-ended mutual funds?

Open-ended mutual funds main function is the same – to pool money from investors to invest. The main difference is that open-ended funds can issue an unlimited number of units and investors are able to cashout anytime you want at the same price as the NAV on the day. 

The fund buys units from investors looking to redeem it and sells units directly to investors. 

The unit price is set daily at the end of the day based on the net asset value (NAV). NAV is the difference between the assets and liabilities of the fund.

ProsCons
A diversified portfolio reduces risk They’re priced only once, at
the end of the day
Low investment minimumsMust maintain a decent pool of funds to redeem unitholders
Easily redeemableCharge a higher management fee compared to closed-end funds

Next, we’ll cover open-ended mutual funds in Nepal and their performance so far.

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