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 20 mutual funds. They are all managed by different commercial banks of 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?
Theoretically, mutual funds are managed by fund managers that 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 accurately predict 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 on 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 of smoothing out the uncertainties in the market. What this means is, even if the stock market and overall economy is declining, mutual funds have slightly lesser amount of loss. However, since the fund managers can not invest aggressively in risky assets, mutual funds also give less 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, 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 into the world of investing, you can simply invest in a mutual fund to test the water. If you fall into this category, I suggest you to also invest a tiny sum in stocks themselves. See, if you invest, you are either going to lose some or gain some. But you will rarely be at 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 and all, you will either gain or lose. Simple. Just invest a bit and keep learning. Keep failing AND keep learning.
This is a list of mutual funds currently in operation in Nepal. Just skim through the list. We will explore how much returns they have given in the latter part of this article.
- Citizens Mutual Fund – 2
- Citizens Mutual Fund-1
- Global IME Samunnat Scheme 1
- Laxmi Equity Fund
- Laxmi Unnati Kosh
- Laxmi Value Fund-1
- Nabil Balanced Fund – 2
- Nabil Balanced Fund-1
- Nabil Equity Fund
- NIBL Pragati Fund
- NIBL Samriddhi Fund 1
- NIC ASIA Balanced Fund
- NIC Asia Growth Fund
- NMB 50
- NMB Hybrid Fund L- 1
- NMB Sulav Investment Fund-1
- Sanima Equity Fund
- Siddhartha Equity Fund
- Siddhartha Equity Oriented Scheme
- Sunrise First Mutual Fund
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 sum 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 maths 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 are 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.
Enough bitching about mutual funds. I’ll just mention the returns of mutual funds in Nepal. Study their performance and judge for yourself.
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Comments:
Mutual funds distribute dividend at the end of every fiscal year. While writing this, Nepal is currently in the fiscal year 2077/78. Although our year ends in Chaitra, a fiscal year actually ends in Ashad.
As you can see, a lot of the funds did not exist two or three years ago. You can also see the minimal returns that they have given so far, with a few exceptions.
However, I must mention that NEPSE was in a bearish phase during this time period. Thus, it is logical that mutual funds also provided a diminished returns.
Since many investors believe that NEPSE has already entered a bull phase, we can expect these mutual funds to improve their returns. However, do not expect a game-changing performance. Mutual funds will never beat the overall market because of the limitations discussed in the demerits above.
Although I am saying all this, I also invested in a mutual fund immediately after I made my Demat account and Meroshare. Needless to say, the fund is in loss even at a time when NEPSE has been decisively bullish.
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