Is the charm over Mutual Funds really diminishing among investors? What do industry experts say on this issue?
Sun, Feb 4, 2018 11:41 AM on Latest, Exclusive, Mutual Fund, Mutual Fund, Featured, Stock Market,
- Manil Maharjan
This is a build-up story to the earlier one where we came across with several of benefits the investors can receive from mutual funds. This time, we will evaluate the interest and charm these mutual funds command in Nepal keeping the recently floated NIC Asia Growth Scheme and Citizen Mutual Fund-1 in the center of analysis.
Also Read: Know more about the sector of merchant banking in Nepal
These mutual funds had set 7-8th of Magh, 2074 as their earliest closing day for their issues, however, both haven’t still closed the issue suggesting low collection. By the earlier proposed date of closing, both had managed to raise only half of the required capital from the market. Almost similar was the fate of Sanima Equity Fund which had issued Rs 1.20 arba (expanded to Rs 1.30 arba) worth of its mutual fund scheme from Mangsir 12 to 22, 2074. In that issue, the subscription rate was met after the extension of the deadline with 21,135 applicants grabbing all the units they had demanded.
Nevertheless, there are plenty of other issues where people have applied to IPOs and FPO despite of knowing that such issues would be over-subscribed by manifold and their chances of winning shares are slim. First, it’s the case of recently closed FPO by Premier Insurance where the non-life insurance company had managed to raise Rs 3.22 arba from 1.83 lakh applicants, which is an excess by more than 6 times. The issue was for slightly over 6.59 lakh unit shares where only some 65 thousand applicants can be guaranteed to be provided with 10 unit shares.
Next, it’s the case of Radhi Bidyut that had managed to raise Rs 1.28 arba from 1.61 lakh applicants despite of the fact that the IPO was floated only for slightly over 7.64 lakh unit of shares. It was a known fact that some 71 thousand applicants were only destined to receiving a meager 10 unit shares, however, the interested applicants kept growing to more than double.
The third instance to be considered here is that of Unnati Microfinance that had managed to raise Rs 80 crore from 2.49 lakh applicants. The issue was for a scanty 1.65 lakh unit of shares which meant a small chunk of 16 thousand applicants could only receive the shares. However, the number of interested applicants kept growing and only some 6.40% received the shares.
In such a context, there could be many reasons for the low rate of attraction among the public towards the mutual funds. We have tried to debug few of those reasons via the opinions of few investors and the merchant bankers.
Rishi Raj Gautam, Lecturer- Shanker Dev Campus
First, we need to analyze the point of time when the recently floated mutual fund schemes (MFSs )are coming into the market. In this declining market, the timing seems quite suitable because these funds will get cheap shares to invest so that they can get handsome returns once these cheap shares surge up. Nevertheless, the timing was comparatively more unsuitable because the crunch of investable funds in part of the investors who had to pay 40% income tax in advance had left many investors like me dry and withered.
Next, it’s all about the value one can get out of his/her money. If one can purchase a mutual fund below par value or slightly more than the par value of Rs 10 in the secondary market, then why should the investor go through long process of subscribing to mutual funds and wait for them to get listed in NEPSE.
Third, the investors are turning smarter these days. Recent mutual funds issued by Global IME, Nabil, NMB among others haven’t provided big returns to the investors who had actually jumped into those schemes expecting a big return like other equity shares. Making the situation more aggravated were the merchant banks who failed to live up to the expectations of the investors. Neither have they succeeded in maintaining good NAV, nor were they able to charm inexperienced investors to join share market through mutual funds.
In such a situation, the regulators as well as the government should learn lessons from other countries where mutual funds are performing really well. For example, in India, their government has provided certain tax exemption benefits for those who make investment in mutual funds. Our government, too, should promote investments in mutual funds by making investments in mutual funds tax deductible. Other regulators should help in market diversification as mutual funds in Nepal do the same business as general people do i.e. by investing mostly in shares of banking and financial sector. But if more and more investment options are available, these schemes can diversify their investment and can avoid the situation like we are facing currently.
However, there’s always light at the end of tunnel and beginner investors will undoubtedly find their money in safe hands if mutual funds are prioritized over other equity shares. Considering the rate of risk, it is still advisable for such inexperienced investors to have faith on mutual funds rather than injecting their money haphazardly into share market.
Ram Prashad Maharjan, Investor
As an informed investor of share market, one could find many reasons not to apply in the recent mutual fund schemes of NIC ASIA and Citizens. First, it is due to falling market. Why would one invest his/her Rs 10 in newly floated schemes when other experienced schemes can be purchased in around the same price in the secondary market? Next, the NAVs of every schemes are declining and the profit yields are even lower than the interest yield in fixed deposits. In such a context, the experienced ones would flock to purchase the mutual funds only when these funds are about to declare their dividends.
In case of retail investors who have scanty knowledge about share market, MFSs are undoubtedly the better investment options. However, the issue managers of those mutual funds and even the SEBON have failed miserably to promote the usefulness of MFSs among the layman investors. In comparison to IPOs and FPOs, hype and publicity of these schemes had been really poor.
SEBON and Merchant bankers, in particular, should launch more promotional campaigns to bring in scattered funds as per the principles of mutual funds. These responsible bodies should take more financial awareness programs to the semi-urban and rural areas of the nation so that more and more folks would know about the benefits of investing in mutual funds.
Niraj Giri, Spokesperson- SEBON
Willingly or unwillingly, we have to accept that the heavy concentration of the investments of MFSs has been in banking scrips. So when the overall situation of banking industry goes awry, it’s quite natural that the holdings of MFSs start suffering loss. Therefore, we must not conclude that Mutual Funds have lost charm in the market. In fact, the current situation is just a reflection of the diminishing market. Once the market improves, undoubtedly the investors will appear in the scene willing to get hold of every kinds of shares.
Despite of the usefulness of MFSs to small and beginner investors, it’s very unfortunate that we have not been able to attract those investors and the issue managers currently are forced to extend their deadlines of issuance. It has to be seen as a collective failure from the perspective of SEBON and from the issue managers who have failed to motivate beginner investors to have faith on MFSs. Hopefully, the situation will improve in the coming days and the investors will have plenty of sessions on financial literacy.
What do industry veterans say?
Experts in the industry believe that the popularity of MFSs is directly related with the impact of timing of the issue. The current issues could have performed much better had the timing been favorable. The entire market is facing a brunt of diminishing market and the same is the reflection in current issues. Moreover, it is also quite observable that failure in raising awareness among the small investors and motivating the informed investors through their performance have jointly played role in the present grim situation of mutual funds.
Next, our industry is relatively young for Mutual Funds. Formally, the mutual funds started operating from late B.S. 2060s in Nepal which is the main reason why these funds are yet to reach to the masses. Basically, it is the failure in part of responsible stakeholders to create appropriate environment among the small and new investors regarding MFSs which has led to the situation like the present one. Furthermore, the policies of government have failed to promote investment in mutual funds. For an example, a clear-cut policy for tax rebate for the investors of mutual funds has a potential to pull big chunk of investors to MFSs which our government has failed miserably.
Likewise, the most overlooked aspect of mutual funds in Nepal is the high operational charges that these mutual funds bare throughout the process of initiating and operating those mutual funds. For an instance, the fund managers are mandated to spend some 3 to 5% in clearing various regulatory fees alone which is undoubtedly trimming the share of profit of these funds. Consequently, this takes toll over the public money the mutual funds collect with a promise of better return as in most cases. Making the situation worse is the lack of opportunity of actual diversification of investments in Nepal which has been stifling the mutual fund managers to work in accordance to their principle of diversification.
The third instance to be considered here is that of Unnati Microfinance that had managed to raise Rs 80 crore from 2.49 lakh applicants. The issue was for a scanty 1.65 lakh unit of shares which meant a small chunk of 16 thousand applicants could only receive the shares. However, the number of interested applicants kept growing and only some 6.40% received the shares.
In such a context, there could be many reasons for the low rate of attraction among the public towards the mutual funds. We have tried to debug few of those reasons via the opinions of few investors and the merchant bankers.
Rishi Raj Gautam, Lecturer- Shanker Dev Campus
First, we need to analyze the point of time when the recently floated mutual fund schemes (MFSs )are coming into the market. In this declining market, the timing seems quite suitable because these funds will get cheap shares to invest so that they can get handsome returns once these cheap shares surge up. Nevertheless, the timing was comparatively more unsuitable because the crunch of investable funds in part of the investors who had to pay 40% income tax in advance had left many investors like me dry and withered.
Next, it’s all about the value one can get out of his/her money. If one can purchase a mutual fund below par value or slightly more than the par value of Rs 10 in the secondary market, then why should the investor go through long process of subscribing to mutual funds and wait for them to get listed in NEPSE.
Third, the investors are turning smarter these days. Recent mutual funds issued by Global IME, Nabil, NMB among others haven’t provided big returns to the investors who had actually jumped into those schemes expecting a big return like other equity shares. Making the situation more aggravated were the merchant banks who failed to live up to the expectations of the investors. Neither have they succeeded in maintaining good NAV, nor were they able to charm inexperienced investors to join share market through mutual funds.
In such a situation, the regulators as well as the government should learn lessons from other countries where mutual funds are performing really well. For example, in India, their government has provided certain tax exemption benefits for those who make investment in mutual funds. Our government, too, should promote investments in mutual funds by making investments in mutual funds tax deductible. Other regulators should help in market diversification as mutual funds in Nepal do the same business as general people do i.e. by investing mostly in shares of banking and financial sector. But if more and more investment options are available, these schemes can diversify their investment and can avoid the situation like we are facing currently.
However, there’s always light at the end of tunnel and beginner investors will undoubtedly find their money in safe hands if mutual funds are prioritized over other equity shares. Considering the rate of risk, it is still advisable for such inexperienced investors to have faith on mutual funds rather than injecting their money haphazardly into share market.
Ram Prashad Maharjan, Investor
As an informed investor of share market, one could find many reasons not to apply in the recent mutual fund schemes of NIC ASIA and Citizens. First, it is due to falling market. Why would one invest his/her Rs 10 in newly floated schemes when other experienced schemes can be purchased in around the same price in the secondary market? Next, the NAVs of every schemes are declining and the profit yields are even lower than the interest yield in fixed deposits. In such a context, the experienced ones would flock to purchase the mutual funds only when these funds are about to declare their dividends.
In case of retail investors who have scanty knowledge about share market, MFSs are undoubtedly the better investment options. However, the issue managers of those mutual funds and even the SEBON have failed miserably to promote the usefulness of MFSs among the layman investors. In comparison to IPOs and FPOs, hype and publicity of these schemes had been really poor.
SEBON and Merchant bankers, in particular, should launch more promotional campaigns to bring in scattered funds as per the principles of mutual funds. These responsible bodies should take more financial awareness programs to the semi-urban and rural areas of the nation so that more and more folks would know about the benefits of investing in mutual funds.
Niraj Giri, Spokesperson- SEBON
Willingly or unwillingly, we have to accept that the heavy concentration of the investments of MFSs has been in banking scrips. So when the overall situation of banking industry goes awry, it’s quite natural that the holdings of MFSs start suffering loss. Therefore, we must not conclude that Mutual Funds have lost charm in the market. In fact, the current situation is just a reflection of the diminishing market. Once the market improves, undoubtedly the investors will appear in the scene willing to get hold of every kinds of shares.
Despite of the usefulness of MFSs to small and beginner investors, it’s very unfortunate that we have not been able to attract those investors and the issue managers currently are forced to extend their deadlines of issuance. It has to be seen as a collective failure from the perspective of SEBON and from the issue managers who have failed to motivate beginner investors to have faith on MFSs. Hopefully, the situation will improve in the coming days and the investors will have plenty of sessions on financial literacy.
What do industry veterans say?
Experts in the industry believe that the popularity of MFSs is directly related with the impact of timing of the issue. The current issues could have performed much better had the timing been favorable. The entire market is facing a brunt of diminishing market and the same is the reflection in current issues. Moreover, it is also quite observable that failure in raising awareness among the small investors and motivating the informed investors through their performance have jointly played role in the present grim situation of mutual funds.
Next, our industry is relatively young for Mutual Funds. Formally, the mutual funds started operating from late B.S. 2060s in Nepal which is the main reason why these funds are yet to reach to the masses. Basically, it is the failure in part of responsible stakeholders to create appropriate environment among the small and new investors regarding MFSs which has led to the situation like the present one. Furthermore, the policies of government have failed to promote investment in mutual funds. For an example, a clear-cut policy for tax rebate for the investors of mutual funds has a potential to pull big chunk of investors to MFSs which our government has failed miserably.
Likewise, the most overlooked aspect of mutual funds in Nepal is the high operational charges that these mutual funds bare throughout the process of initiating and operating those mutual funds. For an instance, the fund managers are mandated to spend some 3 to 5% in clearing various regulatory fees alone which is undoubtedly trimming the share of profit of these funds. Consequently, this takes toll over the public money the mutual funds collect with a promise of better return as in most cases. Making the situation worse is the lack of opportunity of actual diversification of investments in Nepal which has been stifling the mutual fund managers to work in accordance to their principle of diversification.
