Are the risk diversifying mutual funds minimizing their expenses? Are the regulatory policies in support of the mutual funds?

A Mutual fund’s competitive advantage lies in its ability to diversify the risk by managing its portfolio. Mutual funds collect a pool of fund from small investors and in return, invest in financial instruments compromised of stocks, bonds, debentures, government securities, fixed deposits. The investment decision of a mutual fund is determined by Fund Manager and Fund supervisor. Thus, the efficiency of a mutual fund often depends upon the expertise of these professionals.

While it is equally important for risk diversification of the mutual fund, it is also of essence, these mutual funds attain enough operational profit for their sustenance. In order to attain the targeted operational profit, mutual funds are required to take in charge of their expenses. The major initial expenses that mutual funds come across through are:

1. Brokerage commission on buy and sell of shares
2. Application and registration fees
3. License request and renewal fees
4. Approval fees for operating schemes and IPO issuance

Some of the major expenses that mutual fund incur are:

1. Fund manager and depository fee
2. Fund supervisor fee

These two expenses constitute almost 95% of regular yearly expenses. However, some other regular and normal expenses further include:

1. Audit fee
2. Publication expenses
3. NEPSE listing figure
4. Fund supervision meeting fees

As we are well known that a good track record of expenses can be beneficial to any financial institute. Such track record can help to minimize the expenses of mutual funds as well. If such expenses are not taken care of, a major chunk of fund revenue is spent on covering all these expenses. So, have the mutual funds in Nepal been able to minimize their expenses?

Nabil Balance Fund 1 and Siddhartha Investment Growth Scheme 1; the mutual fund schemes which have already matured are seen to be one of the most costly mutual fund schemes. The average yearly expense with respect to the fund size is 4.74% and 4.46% of Nabil Balance Fund 1 and Siddhartha Investment Growth Scheme 1 respectively. NMB Sulav Investment Fund 1 and NIBL Sambridhi Fund 1 also incur about 3.34% and 3.06% expenses in average yearly. Similarly, the average yearly expenses of mutual funds such as Siddhartha Equity Oriented Scheme, Nabil Equity Fund, Laxmi Value Fund 1, NIBL Pragati Fund and Global IME Sammunat Scheme 1 have expenses above 2% of the total fund size.  The new schemes such as SANIMA Equity Fund, NMB Hybrid Fund 1, Siddhartha Equity Fund, Laxmi Equity Fund, NIC Asia Growth Fund and Citizen Mutual Fund have average expense percentage above 1% of total fund size. NIC Asia Growth Fund and Citizen Mutual Fund have less expenses but the reason can be the initiation of these scheme in the middle of the fiscal year. So, there is high probability that the expenses of these funds will also increase if proper consideration is not done.

Provided that, mutual funds are still in their infancy, these funds are still not able to attract majority of individual investors. Most of the mutual fund units are subscribed by institutional investors like the commercial banks, insurance companies and other investment companies at the time of first issues. One of the major reason individual investors are not attracted can be attributed to the cost associated with mutual fund investment.

While mutual funds in international market have grabbed a lot of attention, Nepalese mutual funds are still struggling to manage their expenses. One of the responsible authorities for the management of mutual funds is SEBON. So, long term plans to attract individual investors towards mutual funds and appropriate mechanisms to minimize operating costs for mutual funds are expected from the authority. The discount facility on brokerage commission is also expected as the yearly turnover of mutual funds is far higher than the retail investors in capital market.

We often prioritize discussion on investment risk diversification, portfolio diversification and minimization of emotional stress of investors. However, mutual funds are established with the aim of fulfilling all the three objectives. Yet, when it comes to managing the expenses of mutual funds, the policies have somehow failed. Until and unless we bring in the mass individual investors towards mutual fund investments, the future of these schemes and funds seems uncertain. 

What are your views on mutual funds? Have you ever applied in any of the shares of mutual funds in primary and secondary market? If yes, which do you prefer? If not, why? Please put forward your views in comment section below.