Do you know that you can be a mutual fund shareholder at Rs 10?
Prabhu capital, with the introduction of 8 to 8 service, exclusive customer service unit, and online Demat service, has been an example in the merchant banking industry in Nepal. With a similar disruptive mindset, Prabhu capital is going to introduce its first mutual fund scheme – Prabhu Select Fund, which will be open for application from Jestha 5.
This is a transcribed version of the interview with the Chief Operating Officer of Prabhu Capital, Mr. Krishna Giri.
With the pandemic worsening, how are you feeling?
Despite the pandemic worsening day by day, I am doing well and so are our employees. Times are challenging right now, but we are consistently working hard to provide the best possible service to our clients. Currently, we are working on our first mutual fund scheme, and with its introduction, we believe we will be able to help our thousands of new investors (scheme investors) to generate a well-balanced return.
It must be challenging for you and your employees to work in the middle of such a health crisis?
Times are tough right now. But it is not only us who are putting an effort to make this work, our employees, regulatory authorities, government, and our valued customers have all played their part for this to be better. Firstly, the Nepal Government, Health Ministry and District Administration Office (DAO), and Securities Exchange Board of Nepal (SEBON) have issued guidelines to provide service safely and soundly. Following such guidelines and adding an extra layer of caution and protection from our side, we have been running our office. Right now, only 3 of employees come regularly to the office. For remaining we have arranged everything necessary for them to work from home. Further, we have been continuously monitoring the health of our employees and adopted all the necessary health protocols to make our office as safe as possible.
You informed me earlier that Prabhu Capital is introducing a mutual fund scheme named Prabhu Select Fund, can you explain more about the scheme?
Sure. Prabhu Select Fund is a close-ended mutual fund, which will expire in 7 years. The scheme is worth Rs 1 billion, thus we will be issuing 100 million units of the scheme at a face value of Rs 10 per unit. We have a plan to invest above 80- to 100% of the fund in equity investment.
Can you explain more about your investment strategy for Prabhu Select Fund?
As the name itself suggests, Prabhu Select Fund has been designed to select only the best of the best stocks at a time. Investable securities in Nepal have been increasing and the current number of listed Equity securities has reached almost 200. But when you look at the current financial statements of those companies, analyze industry outlook, or analyze the growth prospect of these companies, you will find that there are a handful of companies that are far superior to others. Thus, our strategy is to blend the selection of few value stocks along with potential growth stock, thus picking on the best of the best stock at the time. For this, we have capped the number of holdings to 30. Further, as NEPSE is planning to introduce NEPSE 30 in near future, we plan to take this index as a benchmark and strive to perform better than the index. We have created various parameters to select the stock, and based on such parameters, and our research, we will be making our investments.
How do you see the current condition of the capital markets in Nepal, and what do you think about the impact of mutual funds on the capital market?
Right now, I believe, we are in a golden stage of the capital market of Nepal. For any country, the Capital market tends to be an integral part of the overall growth of the nation, and we have been embracing that too. If you go back a decade, then you can see that almost all the transactions were carried out in papers. Broker commission used to be too high, and the capital market was solely dominated by the banking sector. We moved from such times to an era where almost everything has been automated. With the introduction of DMAT, the certificate system was eliminated. Further, now you can trade through an online platform, and do not directly need to contact your broker over the phone or visit their office to buy or sell a security. We are embracing the change, and the system has been constantly growing better, for the capital market to operate more smoothly. Further, in the last one-year period, more than 1.7 million DMAT accounts have opened, which clearly shows interest and increased participation from the general public.
Another important milestone achieved is the IPO through the book building method. I firmly believe that through this important step, we will see hundreds of companies from real sectors entering the market. This will be an important milestone for the private equity and venture capital firms as well, as now, they will have a proper existing strategy.
Still, we have a long way to go. In the next few years, we should achieve new milestones as well. Since now, we have shifted to a complete online trading system, now, I believe the next step will be the management of margin lending and, the introduction of intraday trading and short selling. After that, once the market will be extremely liquid, the introduction of derivative products should be a must for our capital market to get proper validity.
For such development and overall stability of the market, I think mutual fund plays a huge role. In the beginning, our market was not that liquid, and we had a handful of institutional investors and very few retail traders, trading regularly in the market. Thus to develop the overall condition of the market, and to help retailer investors properly channel their savings in the capital market to yield a higher return than from their saving investment tools, the Nepalese market adopted the international practice of mutual fund, where professional investors invest for such retail investors who don’t have adequate expertise and help them to achieve the financial goal that they always have wished for. While analyzing the historical performance of the mutual fund, we have seen that few have achieved their goal, whereas few have lagged. However, overall, the mutual fund has set a tone and contributed its part in overall capital market development. Such funds have helped to create a more rational market, helped small investors to channel their savings, and at times, through their learnings, have brought various suggestions to regulatory bodies, thus improving the overall scope of the market.
Can you briefly explain the objective of the fund?
The sole objective of the fund is to generate a return higher than that of the benchmark index so that we can provide a financial edge to our investors.
The fund will invest in different investment instruments as classified by mutual fund guidelines, once the fund is received after the NFO of Prabhu Select Fund. We believe that, through the introduction of the Prabhu Select Fund, we will be able to contribute as an institutional investor in the overall growth of the capital market of Nepal.
Can you explain more about the investment scope of your fund?
Our investment scope has been defined by mutual fund guidelines introduced by SEBON. We will make investments in:
- Equities registered on board
- Publicly traded equities
- Equities or debt instruments which has been issued by Nepal Government or has been guaranteed or monitored by Nepal Government, and debt instruments such as bonds, treasury bill and other money market instruments introduced by NRB
- Deposits in Banks and Financial Institutions
- Money Market Instruments
- Other areas of investments as defined by SEBON
Our large chunk of investment, approximately 70-80%, will be in equities listed on Nepal Stock Exchange. And at a time, we will be investing a maximum of 30 best stocks listed in NEPSE, thus generating a decent return for our investors.
There are so many options for the investor to invest in right now. One can invest in real estate, gold, or listed, and unlisted equities. So why do you think, a person should invest in a mutual fund?
This is a very interesting question, and to answer this, I would have to explain who our potential investors are. Today, the cost of gold has increased to more than Rs 90,000 per tola. If you plan to invest in a decent real estate plot inside or even outside the ring road area, you will have to invest in millions. Rather than for individuals who invest in millions, our goal is to reach thousands of small investors who plan to convert their savings into investments. The concept of mutual funds has been designed for people who want to invest in the capital market but finds the market to be too risky to invest at any given point in time. Especially, right now, when NEPSE is trading near its all-time high, a small investor has a fear that they might lose their invested capital. Thus mutual fund is for such small investors, who want to be a part of the capital market, and while doing so, increase their invested money with minimal risk, over a specified time horizon.
Right now, there is other 21 mutual fund, and what makes your mutual fund different from that of others?
There are indeed 21 mutual funds, and many will be introduced in the future as well. But if you closely look at the objective and constructions of each mutual fund, you will find a lot of difference. This is our first mutual fund, and we have introduced a fund with a strong motive. As I mentioned earlier too, our target is to generate a return superior to that of the benchmark index and make our fund itself a benchmark, which will be used for a comparison purpose for other such funds. We know that through over-diversification we can never achieve our goal. Our return will somehow be pegged with the movement of the index. Thus, to generate a superior return, we have designed our mutual fund to be a selective fund, where we will invest at a maximum of 30 best stocks at a time. We have developed a solid research team, and our fund supervisors have a long experience in the capital market to guide us to make a sound investment decision. This has been reflected in our past performance as well. Right now, we manage a fund worth Rs. 2 Billion, and our return this year is by far the best among all other peer companies. Our investors are happy with our performance. This is solely due to our investment philosophy, which we will be adopting in Prabhu Select Fund as well. Even when the market was in a downtrend, we had invested in selected stocks which in the end generated a decent return for both us and our clients. Thus, with our expertise, insight from past performance, and our investment strategy, we have projected the fund to be worth 3 times in 7 years.
Right now, the market is near its all-time high, and it’s also for sure that the price of companies that you will invest in will be high. How do you plan to mitigate risk on such investments?
If you invest in the capital market, you know that risk always exists in the market. Right now, the index is near 2700, so the fear is somehow obvious. But the same fear even existed when the market was trading near 1100. Many of the investors thought that the market was bound to go down, thus they preferred to wait rather than making investments. Same investors could not again enter the market when the index rose to 1400-1500 level, as they thought the market was priced high at that time. And later, when the market further increased from there onwards, they were bound to enter. We have seen some investors, panic selling when the market went under a slight correction. And during this bull run, many of them hardly could generate a return between 30-40%. Thus, we can clearly say that fear always exists in the market.
Our primary focus has always been on the company’s financial performance. Where the company stands right now, and where the company will be in the near future are always in the top of our heads. We have adopted a top to bottom approach, where we start our analysis from the macro perspective followed by a thorough analysis of liquidity conditions. Once done, we analyze the sector as a whole and analyze the overall growth prospect of the sector. This allows us to weigh the different sectors in our portfolio. After that, we find the best of best companies from a sector, analyze their current financial prospect, management team, their growth strategy, and project their growth. This allows us to see whether a company is undervalued or overvalued as of now. Lastly, we use technical analysis to then find a decent point of entry or exit from that stock. So you can see that we have a set of guidelines that we follow to find the best of best stocks, and analyze when to enter and exit. And we believe that no matter where the index is at, we will always find a handful of undervalued stock to invest in.
What kind of return can investors expect from investing in Prabhu select funds?
We have projected that our unitholders will get an annualized return of 20.0% from their investment on our mutual fund, and if they hold their investment till maturity, their investment value will be tripled. So based on this, for investors who are willing to invest in a long-term fixed deposit for a fixed return, this investment instrument can be a perfect pick for them as well. Further, the mutual fund tends to be more liquid than the fixed deposit, as investors can sell their mutual fund units from Nepal Stock Exchange, once the mutual fund gets listed.
While analyzing the past mutual funds, few have performed poorly and this has disappointed many investors. So how do you plan to actualize your projected return, and make your investor happy? Do you have any specific plan to generate such returns?
If you look a little deeper you will see that mutual funds were allowed to work, but a lot of restrictions were imposed for the mutual fund to perform well. Right now we don’t have a lot of instruments such as short selling, options, and intraday trading, which the institutional investors such as mutual funds, would have fully utilized, and generate a decent return to their investors. Despite various restrictions, if we analyze we can see that in the overall time horizon, almost every one of the mutual funds has performed well and in most of the cases they have met their projections too.
Like I mentioned earlier, our investment rationale is different, and we have our investment strategy for our fund. Our strategy has worked for our current shareholders, and I believe it will work for our mutual fund unitholders as well. Thus, I am confident that we will be able to provide our projected returns to our valued mutual fund investors.
What do you think will inspire investors to invest in the Prabhu select fund?
I believe that the trust of our investors toward us is the most vital aspect to invest in the fund. Further, as our projections are relatively high, and our strategy is different from our peers, this should inspire investors to invest. This is our first mutual fund, and to be a part of our investment return, I believe investors will be inspired to participate.
Lastly, apart from the mutual fund, can you explain what Prabhu Capital does? And what are your plans for the near future?
Currently, we are working as a share registrar of 13 companies. Apart from that, we are working as an issue manager as well as an underwriter. Along with this, we provide DMAT service through our head office as well as through 200 branches of Prabhu Capital. Further, we provide portfolio management service (PMS) to our clients as well. These are the areas that we are currently working on. Now, we are introducing our first mutual fund – Prabhu Select Fund as well. Further, we have provided an application for advisory service at the Securities Board of Nepal. Rather than working as a traditional merchant banker, we see ourself more as an investment banker, and we have been working on such areas. We have also tried to digitalize most of our services to our clients, and we will further be moving in the same direction. Further, we are working on a special service for our clients, and we believe this will come as a surprise to our clients and they will be excited about it.