How to Buy Mutual Funds in Nepal
Interested in Learning About Buying Mutual Funds in Nepal?
You have come to the right place!
Mutual Funds are not a new thing in the context of Nepal. However, since news of the stock market is so centralized, few people have the necessary grasp of the industry. Mutual Funds provide an excellent, balanced return on your savings that is typically higher than what banks provide. Further, the risk is also greatly minimized—which makes buying mutual funds in Nepal one of the best investment strategies.
What Is a Mutual Fund and How Does it Work?
A mutual fund is basically a "security" - just like a stock or share of any company. When buying mutual fund scrips, you are buying "units" of the mutual fund. In the context of Nepal, every mutual fund has a par value (or face value) of Rs 10 per unit. Likewise, every share of a company has par value of Rs 100 per unit.
A mutual fund is a collection of funds invested by thousands of people. This fund is managed by fund managers. They diversify the funds collected into several investment instruments like share market, fixed deposit accounts, bonds, debentures and others. This way, if one sector is crashing, another balances it, so that maximum return can be obtained with the best possible minimization of risk. Risk Minimization is the fundamental principle of the management of mutual funds.
In the context of Nepal, the fund manager is a subsidiary of a class "A" commercial bank. For example: NMB Capital (subsidiary of NMB Bank), NIBL Capital Markets (subsidiary of Nepal Investment Bank) and Siddhartha Capital (subsidiary of Siddhartha Bank) are some fund managers that manage a handful of mutual funds.
How Does a Mutual Fund Earn Profit?
Mutual funds invest the money in several instruments: equities (stock market), bonds/debentures, and fixed-income instruments (fixed-deposit accounts). The returns received from them are distributed to each of the units. The value of one unit of the mutual fund is then calculated by subtracting its liabilities (like expenses) from its assets (like bank balance and profit from investments) and dividing the result by the total number of units of the mutual fund issued.
If the current Net Asset Value (NAV) of a mutual fund is greater than the par value, it is said that the mutual fund is in profit. For example, on April 13, 2017, the NAV of the mutual fund Nabil Balanced Fund-1 (NEPSE symbol: NBF1) was Rs 24.87 per unit. This means that those who have 1 unit of NBF1 have made a profit of Rs 14.87 per unit. If the mutual fund was to mature on that date, the holder of 1 unit of NBF1 would have earned Rs 14.87 per unit profit. If the person has 1000 units, he made Rs 14,870 as total profit for a principal of Rs 10,000.
On the other hand, mutual fund scrips in Nepal are liquid and can be freely bought and sold on Nepal Stock Exchange (NEPSE). The process of booking profit through trading in NEPSE is also the most basic one—if you sell for a higher price than what you paid, you made a profit. Mutual fund scrips generally trade for lower values in NEPSE than their respective NAVs. On April 13, 2017, NBF1 was trading for Rs 21.89 per unit in NEPSE.
There are currently 10 mutual funds in Nepal that can be bought and sold in NEPSE.
Two Ways To Buy Mutual Funds in Nepal
1. Initial Public Offering
2. Secondary Market
Two Ways To Buy Mutual Funds in Nepal
1. Initial public offering
Initial Public Offering (Initial Public Issue) is the very first method of raising money for a stock from general public. In Nepal, announcements of IPOs are made public through a national daily newspaper. The IPO runs for 4 business days and one can apply to any initial issue of a mutual fund through the normal process of applying IPO in Nepal. If the mutual fund scrips are bought during their IPOs, they can be bought for exactly Rs 10 per unit only.
Also See: 10 Upcoming IPOs in Nepal
Normally, one will have to apply for a minimum of 100 units i.e. Rs 1,000 minimum.
2. Secondary Market (buying from NEPSE)
When the mutual funds raise money from IPO, those scrips are listed in Nepal Stock Exchange where they can be freely bought and sold. To buy mutual funds from the secondary market, one will have to visit any one of the licensed NEPSE brokers. There are currently 50 brokerage companies.
The buyer should also have a beneficial owner account (also known as Demat accounts). Once the mutual fund scrips are bought, those scrips are then deposited into the buyer's Demat account. This way, mutual funds can be bought in the secondary market.
You Bought a Mutual Fund scrip, now what?
Now that you have bought mutual funds in Nepal, what you do with it depends on your investment plan and portfolio. The mutual fund can be held until its maturity date or can be sold at NEPSE for a profit. Typically, holding it until maturity will provide higher returns (in expense of higher time period) than selling it in the secondary market.