The economy of a nation is highly influenced by its financial system which consists of financial intermediaries, financial markets, financial instruments and financial assets. An efficient financial system is necessary for the economic development of a country as it encourages savings and investments, allocates scarce resources to different productive channels and accelerates the rate of economic development. Mutual Funds are now growing as financial intermediaries of the Nepalese financial system. A mutual fund is simply the professionally managed type of collective investment scheme that pools money from many investors and invests it in money market instruments such as stocks, bonds, treasury notes and other securities. Mutual funds have a professional fund management team who invest the money on behalf of the investors by buying or selling stocks, bonds etc. Mutual funds have to be approved by SEBON (Securities Board of Nepal) first to publish the offer letter and accept the funds as initial public offerings. When the fund units are allotted, they are listed in NEPSE where they can be freely bought and sold.
Buying shares directly from the market is one way of investing, but it requires spending the time to find out the performance of the company whose share is being purchased, understanding the future business prospects of the company, finding out the track record of the promoters and the dividend, bonus issue history of the company etc. An investor needs to do thorough research before investing and if the market is developing, it is more like a dire strait. As a result, many investors find it cumbersome and time-consuming to pore over so much of information, get access to so much of details before investing in the shares. Investors, therefore, prefer the mutual funds’ route which in turn takes the responsibility of investing in stocks and shares after due analysis and research. Another reason why investors prefer mutual funds is that they offer diversification. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investor portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio
Emerging markets represent a vast and exciting investment frontier offering a chance for generous returns to patient, risk-tolerant, long-term investors. In the Nepalese scenario, higher returns are possible because economies and stock markets are both expanding rapidly. The history of mutual fund started with the floatation of NCM Mutual Fund, 2050. The open-ended fund had 10 million units outstanding with Rs. 10 par value, and 10 years maturity period. Currently, there are 13 mutual funds schemes running in the Nepali Stock Market and yet many say we are just getting started. The capital market of Nepal is full of mixed investors that are small and large in terms of the investment amount. In this construction, mutual funds investment may be suitable for all kind of investors. They accommodate large investors who have resources but lack know-how and time to manage large portfolios and also small investors who don’t have sizeable funds to invest by setting relatively low amounts for initial investments. The Nepalese stock market is characterized by low liquidity, high concentration, and volatility. The investors too are not knowledgeable and trade infrequently which leads to hampering the liquidity. In such a scenario, mutual funds offer the economies of scale, divisibility, and liquidity. While most people consider letting their savings ‘grow’ in a bank, they don’t consider that inflation may be nibbling away its value. Mutual funds provide an ideal investment option to place your savings for a long-term inflation-adjusted growth so that the purchasing power of hard earned money does not plummet over the years. The growth of Nepalese mutual funds industry can also play significant role in channelizing the savings of millions of individuals into investment in equity and debt instruments with the help of expert managers relatively less resource mobilization from surplus-spending units and efficient channelization of the same to the deficit-spending units can contribute to the real economic growth of a nation.
Investors find mutual fund investment so much interesting because of the high rate of return by diversifying their investment and risk. But, in reality, this scope of the high rate of returns is just one side of the coin. On the other side, there is the harsh reality of highly fluctuating rate of returns. In spite of being a diversified investment solution, mutual funds investment in no way guarantees any return. If the market prices of major shares and bonds fall then the value of mutual fund shares are certain to go down, no matter how diversified the mutual fund portfolio be. In order to diversify the investment, many times the mutual fund companies get involved in over-diversification. The risk of holding a single financial security is removed by diversification. But, in the case of over-diversification, investors diversify so much that many time they end up with investing in funds that are highly related and thus the benefit of risk diversification is ruled out.
The bottom line
The current macroeconomic environment, despite concerns over rising inflation rate and the slowdown in the economic growth rate, presents the set of opportunities for fuelling the growth of the mutual fund industry in Nepal. However, as with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuation and sometimes provide returns below the overall market. Also, the liquidity, volatility, transparency, investor literacy, an ambiguity of regulations, lack of customer focus on products are some of the major issues to be resolved by all parties involved in the industry in order to help the industry grow. The solution could be homegrown or inspired by the global best practices fitting the Nepalese market. Apart from these problems, the concentration of Nepalese stock market in banking, financial institution and insurance company stocks making it harder for mutual funds to generate a finely diversified fund. Technology is also seen as a major issue. Transactions are taking a long time to materialize and calculating real-time NAVs (Net Assets Value) is missing. Resolving these inherent issues would ensure a bright future of mutual fund industry in Nepal, at least for the next decade until some other sorts of funds replace them.
Rajiv Giri
Final Year Student of Business Studies (BBS), TU
