Government needs to provide basic tax incentives to encourage investment in mutual funds

It has been more than a year since the first mutual fund was launched in Nepal’s capital market after the promulgation of the Mutual Fund Regulations 2010. When the new regulation was launched, mutual funds were eagerly awaited as the antidote to the bearish market trend. In the last one year since the listing of Siddhartha Investment Growth Scheme I, in January 2013, the market has become bullish and share prices have almost doubled, pushing up the value of the mutual fund’s portfolio in a similar fashion. However, the price of existing mutual fund units have failed to reach similar heights. Dikshya Singh of The Himalayan Times caught up with CEO of Siddhartha Capital — fund manager of Siddhartha Investment Growth Scheme I — Dhruba Timilsina to talk about issues such as the performance of mutual fund units at the stock exchange, and the role of mutual funds in maintaining market balance, among others.

Existing mutual fund units listed at the stock exchange are being traded way below their Net Asset Value (NAV) — the real value of each unit of the mutual fund. Why is it so?

It is true that mutual fund units are being traded below the NAV. Siddhartha Investment Growth Scheme I (SIGS-I)’s NAV is a little above Rs 16 but it is being traded below Rs 13. However, there is no thumb rule that units need to be traded above NAV. Investors will realise the level of value appreciation of mutual fund units and will act accordingly. The portfolio performance of the mutual fund is pretty good in the present scenario. We had started with a total fund size of Rs 500 million, which now is almost Rs 800 million, as the value of our investment in equities has appreciated in the past one year.

Although the fund size has increased due to the bullish stock market, and strings of primary offerings and dividends in the last one year, why is SIGS-I providing only Re 0.45 per unit as dividend?

The dividend that we are distributing at present, which is 4.5 per cent, is from the profits made in the six months of last fiscal year — not the full year. Moreover, it is also higher than what we projected during the launch of the mutual fund, which was eight per cent in the first year of operation.

Back when there were no mutual funds as per new regulations, capital market stakeholders used to advocate that the entry of mutual funds would balance out demand and supply of shares in the market, thus preventing much of the price manipulations by clever players. So, how come similar price movement can be seen in the market despite two mutual funds in existence?

The problem in the market is that rumours rule the trading, although things are getting better. Of late, we have noticed that investors are taking decisions by analysing the fundamentals of the particular company. The price manipulations can be controlled if there can be a way to stop the spreading of unfounded rumours and insider trading. We, as a fund manager, are concerned with investing in shares at the price substantiated by our research and we do not invest in stocks that we think are overvalued. We review the portfolio regularly and manage it in a manner that will yield the best returns. We have not bought primary offerings of a few companies despite being allocated as we do not see good prospects. It may not be highly visible but mutual funds’ orders have been able to contain price volatility in a few cases.

Does that mean the capital market requires a few more mutual funds to stabilise it?

More mutual funds are needed to correct the irrational price volatility. Moreover, with more sectors opening up in the capital market, there is also space for the funds to operate. However, market is concentrated with financial institutions’ equities only and there is no secondary market for fixed income securities, such as bonds. Unless there are enough instruments and sectors to invest in, mutual fund market might reach saturation with four more schemes. In addition, for this instrument to flourish, encouragement from government and regulator such as tax exemption is required.

Although mutual funds are a business entity meant to earn profit for unit holders, why do mutual fund managers and stakeholders demand tax waiver?

We are not asking for extra privileges. All we want from the government is to implement the global practice of allowing some tax waiver on mutual fund investment by public. Even in India, the government allows certain tax saving schemes linked to mutual fund units. We hope our government will realise the importance of such incentives sooner rather than later. For a capital market to sustain without unnatural spikes in share prices, mutual funds are required. Government also needs to provide basic tax incentives to investors to encourage investment in mutual funds so that a larger portion of the population can take advantage of stock trading, which is lacking in Nepal.

Source: THT