History is the greatest teacher but Mutual Funds of Nepal seem reluctant to learn; see how your cash is used

The significant features of a Mutual Fund (MF) are pooling of the resources from small investors, diversification of risk and management of funds from a team of experts. As of now, there are 12 Mutual Fund Schemes listed in NEPSE. After the addition of Citizens Mutual Fund-1 and NIC Asia Growth Fund, we’ll have a total of 14 schemes. You can see the list of Mutual Funds and their NAV (Net Assets Value) here. The 12 MFs in operation are currently mobilizing Rs. 12 arba 30 crore in the market. Among them, the smallest is LVF-1 and the largest is SEF, who are mobilizing 50 crore and 1 arba 50 crore respectively. With such huge amount of resources pooled in, the question is are they really fulfilling their purpose? Their main goal is to maximize the return for the investors while reducing the inherent risks. However, looking at the current context of Nepali MFs, they seem to be effectively reducing the risk but at the expense of return. A huge chunk of their total fund is stuck at banks as Fixed deposits and Money-at-call, which is relatively safer than other investment instruments but also yields lesser returns. What the rule says? According to the Mutual Fund Guidelines-2069, the rule 36 specifies the following conditions the Fund needs to consider before making an investment:

1. In case of the general shares of any company, the MF cannot invest more than 10% of the total paid-up capital.
2. The MF cannot invest more than 20% of its own funds into some other mutual investment funds.
3. The MF cannot keep more than 10% of its total funds as bank deposits.
4. The MF can invest no more than 10% of its total fund in money market instruments.

  What is happening? To fulfil the stated objectives, the MFs can mobilize or invest their funds in stock market, debentures, other debt instruments or fixed deposits. Although it has been specified in the MF manual that the banks can keep their funds as Fixed Deposit only upto 10% of their total structure, there are some outliers. SEOS (Siddhartha Equity Oriented Scheme) has 13.5% in Fixed Deposits, likewise SAEF (Sanima Equity Fund) 20%, LEMF (Laxmi Equity Fund) 20%, NMBSF-1 (NMB Sulav Investment Fund-1) 29.33 and NMBHF-1 (NMB Hybrid Fund L-1) 54%. Looking at the average figures, the MFs of Nepal have invested 60% of their funds in Stock Market, 16.6% on Fixed Deposits and 1.6% on Debentures. Similarly from the remaining funds and the earnings from investment, until Magh end, the 12 MFs have put in 4 arba 32 crore in banks as money-at-call (not as Fixed Deposits). If we were to consider the fixed deposits too then the MFs have hoarded Rs. 6 arba 33 crore in banks, which is round 53% of the total structure. You can see the level of investment in each sector done by each mutual fund below: The recently added Citizens Mutual Fund-1 and NIC Asia Growth Fund have also collected around 1 arba 60 crore from the market. What the data says? Words might be misleading but the numbers don’t lie. It might be normal for NBF 1(Nabil Balance Fund 1) to collect cash from other investments as it expires on Chaitra, 2074. But it isn’t justifiable why NMB’s both schemes has so much amount hoarded into Bank accounts. It seems as though the MFs are focused towards collecting cash for their issue managing banks and management fees. The share market is in a bearish trend and the points are falling, and even in such condition the MFs are more interested in hoarding their cash at banks. The MFs are there for risk management and diversification but that doesn’t imply that they can just put the fund in the banks and enjoy minimal interest rates. If so was the case then the money would be better used by the investors themselves. These inferences not just question the effectiveness of MFs’ experts and their risk managing abilities, but also generates enough probability that the MFs to come in future won’t be well received by the market. What can they do? It’s always easier said than done, but that doesn’t rule out the fact that MFs are there in existence to take risk and diversify it to earn maximum possible return for the investors. The bearish trend of the market might be threatening and maybe some might think it’s not the time to invest. But even if nothing, we can learn from our past. In the bearish market of 2069/70, when the NEPSE index was as low as 518.33 the whole market was in panic, but that was also the time when NBF-1 and SIGS-1 were introduced. After the collection of the funds they started investing in Stock market and from the next fiscal year on they started reaping handsome returns. On the consequent years, the NEPSE index improved and so did the performance of portfolio. NBF 1 reported the highest NAV of Rs. 29.38 per unit on Bhadra end, 2073. Currently, their NAV is above average and is a good indicator of Funds’ performance. You can see their NAV below:  

Net Assets Value (NAV) as of Magh, 2074
S.N.	Symbol	Start Date	NAV (Rs.)	Status
1	NBF1	2069.12.29	18.03	Above Average
2	NMBSF1	2071.07.03	13.67
3	SEOS	2071.04.06	12.26
4	NIBSF1	2071.09.23	12.20
5	LVF1	2071.12.11	11.21
6	NMBHF1	2073.07.10	10.34	Below Average
7	SEF	2074.07.22	10.00
8	SAEF	2074.09.11	9.96
9	GIMES1	2072.12.11	9.38
10	LEMF	2074.02.29	9.15
11	NEF	2073.07.21	9.08
12	NIBLPF	2073.09.27	8.73

  There is no specific formula to exactly pin point when to invest, but with higher risk comes higher return. We, as investors, are normally risk averse and that is why we buy MF schemes to reduce the possibility of loss from the risk. If their idea of risk management is limited to holding cash at bank, we too are very well capable of doing that.