Overview of Mutual Fund

A mutual fund is a financial pool where numerous investors contribute their money, overseen by a professional fund manager. Its objective is wealth maximization by gathering funds from many investors and subsequently investing them in a varied mix of stocks, bonds, and fixed-income securities. Mutual funds are managed by sound financial professionals known as fund managers, who have the expertise in analyzing and managing investments. 

Mutual Fund

Diversifying investments across various securities and asset classes reduces risk. It is the process of spreading a given investment over multiple assets classes. Diversification enables the creation of a varied portfolio that mitigates the challenges faced by different sectors. Investments are allocated across a blend of assets tailored to individual risk tolerance.

5 Important Benefits of Mutual Funds?

1. Diversification

Diversifying investments across various securities and asset classes reduces risk. It is the process of spreading a given investment over multiple asset classes. Diversification enables the creation of a varied portfolio that mitigates the challenges faced by different sectors. Investments are allocated across a blend of assets tailored to individual risk tolerance.

2. Professional Management

Many investors lack the time or resources to conduct thorough research and select individual stocks. This is where professional management proves invaluable. Mutual funds offer the expertise of full-time, experienced fund managers who actively buy, sell and oversee investments, providing investors with professional guidance and management.

3. Liquidity

Liquidating mutual funds for financial needs is convenient. Typically, funds are deposited in your bank within days. 

4. No Prior Knowledge of Markets Needed to Invest

Many people want to invest but do not have adequate knowledge of the share market so mutual funds give them a secure platform to invest.

5. Convenience

Mutual funds offer investors significant convenience by providing access to a diverse array of financial markets through a single investment. A typical diversified equity fund can allocate funds across numerous stocks, with some portion invested in fixed-income securities as well.

6. Return on Investment

All investors strive to increase their Return on Investment (ROI) by investing in financial instruments like mutual funds. This helps them outperform inflation and grow their wealth over the long term. Mutual funds offer promising opportunities for potentially high returns as they allow investment across various sectors and industries, enhancing diversification.

7. Well Regulated

All mutual funds in Nepal are subject to regulation by the Securities Board of Nepal (SEBON). This ensures that mutual fund houses adhere to SEBON’s directives, thereby safeguarding the interests of investors. Furthermore, SEBON mandates monthly portfolio disclosures for all mutual funds, promoting transparency in the investment process.

What are the Disadvantages of Mutual Fund?

1)Overdiversification

When seeking to diversify your investments, mutual funds can be an attractive option due to their ability to invest in numerous stocks, potentially leading to over-diversification. Not all stocks within a portfolio may yield high returns consistently. Investing in two mutual funds with similar portfolios could exacerbate this issue. Therefore, it’s prudent to carefully examine a mutual fund’s portfolio before making any investment decisions.

2)Risk

Investing in mutual funds carries inherent market risk, which applies to all types of securities in financial markets and cannot be mitigated solely through diversification. Market risks stem from various macro and microeconomic factors. For instance, equity mutual funds face volatility risk due to stock market fluctuations, while debt mutual funds are exposed to interest rate risk arising from fluctuations in interest rates, among other factors.

4 Terms Used in Mutual Fund

1) Net Assets Value

Net Assets Value is the total assets minus total liabilities divided by several outstanding shares. NAV is used for buying and selling in mutual funds. For example, i.e. the total assets are Rs. 10 lakh liabilities are Rs. 5 lakh and the number of outstanding shares is 20,000, then NAV is Rs. 25. The significance of NAV is that it acts as an indicator of the funds' performance over a period.

 

2) Exit Load

Exit load is a fee in a mutual fund that investors have to pay if investors redeem the mutual fund unit prematurely. Exit load has been charged in order to discourage investors for short term redemption of units of shares. Exit load is given in percentage for a period of time and if he/she redeems before the time then have to pay exit load. For example if you want to buy 100 units of shares and NAV is Rs. 100 where exit load is 1%.
Then exit load amounts to, 1 % of (100*100) =Rs. 100

 

3) Assets Management Company(AMC)

AMC is the institution that manages all the funds of investors. They must be registered in SEBON to manage the funds. AMC critically analyzes the performance of stock and invests the money accordingly and distributes the return propoentialy.

 

4) Systematic Investment Plan(SIP)

SIP is a good way to invest if the investor does not have knowledge regarding the market. Under SIP people can invest small amounts periodically(monthly, quarterly, and yearly).

Types of Mutual Fund

There are two types of Mutual Funds:

  • Open-Ended Mutual Fund
  • Closed-Ended Mutual Fund

Open Ended Mutual Fund in Nepal

This investment scheme enables investors to purchase or sell units at any time, without a predetermined maturity date. Transactions are conducted directly with the Mutual Fund for both investment and redemption purposes. There are no restrictions on the amount that can be invested in the fund. Typically, these funds are actively managed, meaning they have a fund manager who selects where investments are made. However, they often incur higher fees compared to passively managed funds due to the active management involved.

List of Open Ended Mutual Fund in Nepal

Particulars Scheme Name Fund Manager Fund Sponser Approved Capital amount Price per Units Unit Purchase Exit Load Issue Open Date Maturity date Fund Manaement Fees Depository Fees Fund Superviosr Fees
1 Nabil Flexi Cap Fund Nabil Investment Banking Ltd. Nabil Bank Limited NPR 750,000,000.00 NPR 10.00 No exit load on units with holding period above 24 months 7/23/2079 Not applicable 1.5% of Net Asset Value (NAV) 0.2% of Net Asset Value (NAV) NPR 20,000 per meeting, per supervisor
Holding Period Upto 12 months – 1.5% of applicable NAV
Holding Period 12 months to 24 months – 0.75% of applicable NAV
2 Siddhartha Systematic Investment Scheme Siddhartha Capital Limited NPR. 20 crores NPR 10.00 Min 100 1.5% of applicable NAV within 3 year of purchase
Max 10% of Fund Size No exit load to be levied after 3 years of purchase 1.5% of applicable NAV 0.20% of applicable NAV As per approved Prospectus of the scheme
3 NMB Saral Bachat Fund – E NMB Bank Limited 400000000 NPR 10.00 Min 100 1. Management Fees: 1.5% of the AUM. 1. Depository Fees: 0.2% of the AUM. 0.1% of Asset under Management (AUM)
4,000,000 (Four Million units); 10% of the initial issue size
4 NIBL Sahabhagita Funds NIMB Capital NPR. 2 Billion ( NPR 10.00 @ 1.5% of applicable NAV within 6 months of purchase. 09/01/2076 BS (22/04/2019 AD) 1.25% of NAV 0.2% of NAV 0.12% of applicable NAV.
@ 1.25% of applicable NAV within 6-12 months of purchase.
@ 1% of applicable NAV within 12-18 months of purchase.
@ 0.75% of applicable NAV within 18-24 months of purchase.

5 Advantages of Open Ended Mutual Fund

1) Availability of Past Performance

Investors can monitor the performance of these funds and adjust their decisions based on the net asset value, which is determined at the end of each trading day.

2) Diversified Portfolio

Open-ended funds allow investors to distribute their money among a wide range of assets, including different businesses and sectors. The overall risk of the investment is reduced because of this portfolio diversification.

3) Liquidity Access

Investors in closed-ended funds face no restrictions when redeeming their fund units, providing a swift solution for liquidity needs. Furthermore, on the redemption day, these units can be redeemed at their Net Asset Value (NAV).

4) Systematic Plans

Systematic arrangements offer convenient access to funds for both withdrawals and investments. Participants can utilize options like Systematic Withdrawal Plans (SWP), Systematic Transfer Plans (STP), and Systematic Investment Plans (SIP) to consistently contribute a set amount to the scheme.

5) Low investment

Open-ended funds do not require a huge amount of investment. The investor can start with a small amount of systematic investment plan.

5 Disadvantages of Open Ended Mutual Fund

1)Market Volatility

Open-ended mutual funds are inherently sensitive to market risks due to the volatility and fluctuations in the Net Asset Value (NAV) of the underlying securities. Despite the fund manager’s utilization of diversification methods, these funds remain exposed to market uncertainties and associated risks.

2)Cash Flow Risks

Open-ended mutual funds also face cash flow risks due to daily changes in the NAV, reacting to market volatility. This can cause a negative impact on the returns of the fund.

3) High Expense Ratios

Compared to alternative investing options, open-ended mutual funds may have higher expense ratios, which would lower investor returns.

4) Mis-Selling

Because mutual funds are complicated, there is a chance that dishonest agents or advisors will mislead you and cause you to make poor investing choices.

5) Regulatory Risks

The performance of open-ended mutual funds can also be impacted by regulatory changes, so investors need to be aware of any changes that could have an impact on their investments.

Close Ended Mutual Fund

A closed-end fund is a type of mutual fund that issues a fixed number of shares during its initial public offering (IPO) to raise capital for its initial investments. After the IPO, these shares can be bought and sold on a stock exchange, but the fund does not issue new shares, and no new capital is invested in the fund.

Unlike open-ended mutual funds, which continuously issue and redeem shares based on investor demand, a closed-end fund has a fixed number of shares outstanding. This means that once the IPO period ends, the fund “closes” to new investors until its maturity date.

The price of a closed-end fund’s shares is determined by its Net Asset Value (NAV), but the actual traded price in the market can fluctuate above or below this value based on supply and demand dynamics. Essentially, closed-end funds operate like stocks, trading on exchanges, and having a fixed maturity period.

List of Close Ended Mutual Fund in Nepal

S.N. Symbol Mutual Fund Name Fund Size (Rs.) Maturity Date Maturity Period
1 LEMF Laxmi Equity Fund 1,250,000,000 6/12/2024 7 Years
2 SAEF Sanima Equity Fund 1,300,000,000 12/26/2024 7 Years
3 SEF Siddhartha Equity Fund 1,500,000,000 11/8/2027 10 Years
4 CMF1 Citizens Mutual Fund-1 820,000,000 3/3/2025 7 Years
5 NICGF NIC Asia Growth Fund 835,200,000 3/12/2025 7 Years
6 NBF2 Nabil Balanced Fund – 2 1,120,000,000 5/31/2029 10 Years
7 CMF2 Citizens Mutual Fund – 2 560,000,000 7/8/2026 7 Years
8 NMB50 NMB 50 1,250,000,000 9/1/2026 7 Years
9 SIGS2 Siddhartha Investment Growth Scheme-2 1,200,000,000 8/26/2029 10 Years
10 NICBF NIC ASIA Balanced Fund 755,000,000 8/27/2029 10 Years
11 SFMF Sunrise First Mutual Fund 860,000,000 11/4/2029 10 Years
12 LUK Laxmi Unnati Kosh 652,623,600 10/1/2027 7 Years
13 SLCF Sanima Large Cap Fund 1,200,000,000 2/23/2028 7 years
14 KEF Kumari Equity Fund 1,000,000,000 3/18/2031 10 years
15 SBCF Sunrise Bluechip Fund 1,250,000,000 3/26/2031 10 years
16 PSF Prabhu Select Fund 1,250,000,000 6/21/2028 7 years
17 NIBSF2 NIBL Samriddhi Fund – 2 1,500,000,000 5/29/2031 10 years
18 NICSF NIC Asia Select-30 1,250,000,000 7/5/2028 7 years
19 RMF1 RBB Mutual Fund 1 1,250,000,000 7/23/2028 7 years
20 NBF3 Nabil Balanced Fund III 1,250,000,000 9/23/2031 10 years
21 NICSF NIC Asia Select-30 1,250,000,000 7/5/2028 7 years
22 NMB50 NMB 50 1,250,000,000 9/1/2026 7 Years
23 NSIF2 NMB Sulav Investment Fund – II 1,200,000,000 9/1/2032 10 years
24 NSTF NIBL Stable Fund 1,130,000,000 2/7/2036 12 Years
25 PRSF Prabhu Smart Fund 1,000,000,000 3/14/2032 10 years
26 PSF Prabhu Select Fund 1,250,000,000 6/21/2028 7 years
27 RMF1 RBB Mutual Fund 1 1,250,000,000 7/23/2028 7 years
28 RMF2 RBB Mutual Fund 2 846,119,290 5/21/2033 10 years
29 SAEF Sanima Equity Fund 1,300,000,000 12/26/2024 7 Years
30 SAGF Sanima Growth Fund 672,532,600 11/27/2033 11 years
31 SBCF Sunrise Bluechip Fund 1,250,000,000 3/26/2031 10 years
32 SEF Siddhartha Equity Fund 1,500,000,000 11/8/2027 10 Years
33 SFEF Sunrise Focused Equity Fund 1,000,000,000 2/12/2032 10 years
34 SFMF Sunrise First Mutual Fund 860,000,000 11/4/2029 10 Years
35 SIGS2 Siddhartha Investment Growth Scheme-2 1,200,000,000 8/26/2029 10 Years
36 SIGS3 Siddhartha Investment Growth Scheme 3 805,800,000 4/30/2033 10 years
37 SLCF Sanima Large Cap Fund 1,200,000,000 2/23/2028 7 years

Advantage of Close Ended Mutual Fund

1)Stability for the Fund Managers

Closed-end mutual funds offer stability for fund managers because investors cannot redeem their units until the fund reaches its maturity date. This means that fund managers have a fixed asset base to manage without the pressure of frequent redemptions. Without the need to accommodate redemption requests, fund managers can focus more on achieving the fund’s investment objectives rather than constantly managing liquidity concerns.

2)Market Price based on Demand and Supply

In a closed-end mutual fund, the price is determined by market demand and supply dynamics, much like equity shares traded on a stock exchange.

3)They are not Illiquid

You can buy or sell units of a closed-ended fund from the stock exchange at the existing market prices.

Disadvantage of Close Ended Mutual Fund

1)Not a Great Performance in the Past

While closed-end mutual funds provide fund managers with a platform to develop investment strategies, their historical performance has often fallen short in delivering superior returns compared to open-ended mutual funds.

2)Only the Lump Sum Investment option is available

In closed-end mutual funds, investors can only invest in lump sums, which can increase their exposure to risk. As an alternative, many investors prefer the flexibility and risk-mitigating features of a Systematic Investment Plan (SIP) over closed-end mutual funds.

3) Highly fund manager-driven

Investors frequently assess a mutual fund scheme’s performance over different market cycles in order to determine how attractive it is as an investment option. But while this information is easily available for open-ended plans, it’s frequently not available for closed-ended financial statements. As such, the decisions taken by the fund manager have a significant impact on the performance of closed-ended funds.

What is Systematic Investment Plan(SIP)?

A systematic approach to investing, or SIP, is setting aside a small, predetermined sum of money on a regular basis (typically once a month) for market investments.

6 Benefits of SIP

i) Rupee Cost Averaging

The main benefit of doing SIP is to balance market volatility. Whenever the market goes down you buy more mutual funds and when it gets up then you buy less, this balances out the cost of buying and increases quantity. 

ii) Power of Compounding

The power of compounding in simple words is to reinvest when your actual investment starts giving a return. When you start investing in SIP your returns get reinvested. The longer you invest you get more benefit from SIP.

iii) Flexible Investment Amount

SIP allows people to invest high or low with their ability or preferences. It is flexible for any people who want to invest and in return want to increase their wealth.

iv) Financial Discipline: 

People don’t have the habit of saving so SIP provides the better benefit of being financially disciplined. In SIP people can invest monthly and make a habit for a better future.

v) Convenient Investment Method:

SIP provides an easy way of investing. People need small amounts and can start anytime to create wealth. People who do not have time to do market research can invest monthly and get a good return in the future.

vi) Professional Fund Management

SIP are provided by a professional fund management company which is authorized by SEBON so the investment is safe. The investment is handled by professional fund managers to give good return.

How to Invest in SIP?

  1. Set Your Financial Goals
  2. Select the right Mutual Fund
  3. Contact the Financial Institution
  4. Provide documents as required
  5. Invest

Steps to Invest in SIP

 

 

Overview of Mutual Fund