- Manil Maharjan
NIC Asia Capital Limited is coming out with its first mutual fund scheme,
NIC Asia Growth Fund, worth Rs 1 arba from Magh 2, 2074. Likewise, Citizens Bank's subsidiary CBIL Capital is also floating the issue of its
Citizens Mutual Fund-1 scheme from the same day.
Since their creation, mutual funds have globally been a popular investment vehicle for investors. Their simplicity and other qualities provide great benefit to investors with limited knowledge, time or money. Unfortunately, this hasn’t been the case in Nepal and we shall delve into several facets of Mutual Funds in our context.
First, let us begin with the reasons that make these mutual funds a lucrative investment vehicle for both small and big investors.
Diversification
[caption id="attachment_115644" align="aligncenter" width="800"]
Putting different eggs in different basket minimizes risk[/caption]
One rule of investing—for both large and small investors, is asset diversification. Diversification involves the mixing of investments within a portfolio and is used to manage risk. For example, by choosing to buy stocks of blue-chip companies that consistently provide handsome bonus while also purchasing company stocks for short-term gain, one can diversify the investment. To achieve a truly diversified portfolio, one may even have to buy bonds with varying maturities from different issuers. For the individual investor, this can be quite costly. By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios.
Real-life example:
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Investment Allocation in LVF1 as of January 5, 2018[/caption]
Laxmi Value Fund-1 (LVF1), a mutual fund scheme managed by Laxmi Capital Market, has allocated 43.60% in commercial banks, 30.09% in Insurance companies and around 0.10% in other fixed-income instruments. If one sector carries a significant risk, it is somewhat minimized by the returns of the other.
Economies of Scale
The easiest way to understand economies of scale is by thinking about volume discounts. If you buy only one security at a time, the transaction fees will be relatively large. Mutual funds are able to take advantage of their buying and selling size, and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings.
Divisibility
Many investors don't have the exact and adequate sums of money to buy round lots and big chunk of securities. Some thousand rupees is usually not enough to buy a nice chunk of stocks of a nice company. In this case, investors can purchase mutual funds in smaller denominations, Rs. 10 per unit or Rs. 1000 minimum. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds.
Liquidity
Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time. Imagine, your holdings in the Fixed Deposit Accounts. You will need to suffer a bigger chunk of loss when you actually need some urgent cash when your money is locked at the bank’s coffer. In case of your mutual fund holding, you can trade them in the secondary market for instant cash.
Professional Management
When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you.
Transparency
There are no hidden charges in Mutual Fund investments. All the required information about the fund’s holdings, performance and assets are available to all investors. This allows for transparency in the operation of Mutual Funds, which encourages investors to make informed investing decisions. The existing mutual funds are required to publish their monthly Net Asset Value (NAV) highlighting all their holdings and values that undoubtedly promotes a transparent financial situation.
Handsome average dividend
If you have some cash which you can spare for some years and are therefore thinking for a long-term investment option, then mutual funds can suit your need. The average interest rate of commercial banks for the Fixed Deposit products is some 12-13% (only when such banks face shortage of lendable funds). However the mutual funds listed at NEPSE have been found providing cash dividends slightly above the industry average interest rate and some are even providing much higher dividends year after the year. Below is the comparative presentation of the cash dividend that some decent mutual funds have provided for last 2 years.
Government Preference
The Government policies continuously support mutual funds through various incentives such as tax breaks. The Government of Nepal has promoted mutual funds by waiving tax on capital gain and interest income generated by investments of the mutual funds. This waiver of taxes guarantees the increment in returns as opposed to the gains an individual investor can reap through similar investments in shares in smaller scale. The government has also made mandatory provisions to allocate 5% of the total Initial Public Offerings (IPOs) to mutual funds. This means, the pool of funds from all you and me will be eligible to get 5% of public shares without having to face any lottery.
Scenario in Nepal
Despite of having such a wide prospect for the investors, Mutual Funds don’t receive as adequate attention and acceptance from general investors as other IPOs and FPOs do. In fact, when such IPOs and FPOs are floated in the market, all and sundry can expect that such issues would be subscribed manifold; however, same is not the tale of mutual funds.
Recently, when Unnati Microfinance had offered its shares in primary market, it had collected approximately Rs 80 crore from 2.49 lakh applicants despite knowing the fact that the issue was for only Rs 1.50 crore. Similar was the case when HIDCL had floated its shares worth of Rs 2 arba when the collection had actually exceeded to tens of time. Nevertheless, can somebody remember of similar instances when any mutual fund had received such a large scale acceptance from the public? This shows to what extent is there a deficit of financial awareness among Nepalese investors.
Apply NIC Asia Growth Fund and Citizens Mutual Fund
As put by Warren Buffett, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." This is very much relatable to the present case as two Mutual Fund Schemes promoted by two decently performing commercial banks are out in the market for being grabbed. Both NIC Asia Growth Fund and Citizens Mutual Fund have come out with the issues worth of Rs 1 arba which could further be stretched to Rs 1.25 arba to accommodate any over-subscriptions. Primary issues worth of Rs. 2 arba, therefore, have to be dealt like the gold raining in this case.
Interested investors can apply from
ASBA-approved banks and financial institutions from all 77 districts in Nepal.
Applicants should apply for a minimum of 100 units and for a maximum of 20 lakh units at a price of Rs 10 per unit shares for both the Mutual Funds.
The Bottom Line
"I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over." Clear from this quote from Warren Buffett, we can take these 2 mutual funds as short and simple steps into the share market. Considering all above fundamentals, a wise person would decide to park his/her money into these 7 year Mutual Funds rather than locking the money into the fixed deposit caviars.
