Mutual fund is essential element for sustainability of capital market in any country.  

Siddhartha Capital Limited is one of the two mutual fund operators in the country to this date. Siddhartha Investment Growth Scheme-I, or SIGS-I, is its first and the only scheme so far. Six months into the operation, the scheme may be still slightly undervalued in the market, but is already in a position to provide the dividend it had pledged at the launch of the scheme. Siddhartha Capital is planning to launch its second scheme very soon. Why are the mutual fund schemes still undervalued in the market despite the ongoing rally? And what makes the mutual fund operators upbeat the market prospect? ShareSansar.com caught up with Mr. Dhruba Timilsina, CEO of Siddhartha Capital Limited, to find answers to some of such burning issues. Check it out:

Your scheme SIGS1’s NAV is gradually nudging ahead. But it still remains undervalued in the market in that its value in the market hovers around Rs 16 per unit, which is still below NAV despite the ongoing market surge. How do you explain that?

When we talk about the performance of any mutual fund scheme in any market, and not just in Nepal, the performance of any such scheme depends on a lot of things, including the behavior of market players. Not just in our market, mutual fund schemes, especially the closed end ones, remain undervalued for a long time in more mature markets, too.

In the Nepali context, being a new instrument in the country, investors may not be familiar with the mutual fund schemes, and their response in both primary as well as secondary markets may not be sufficiently mature. So much so that not all the investors are aware of the concept of NAV itself and then many of them sometimes forgot to relate it to the market price. We hope matured response over the period along with the further development of the mutual fund industry.

Insofar as the market value of the mutual fund schemes in the country, it depends on the performance of the scheme and possible future returns of the scheme portfolio; the market price may be undervalued or overvalued - both the scenario we can see in the foreign capital market, as well.

How do you see the current market rally? Is it justified – technically and fundamentally?

Being an investor of the capital market, my comment on valuation of stock prices may create conflict as we have money to invest as well as stock on sale. Such comments are done by independent analysts in the international markets. In our case such analysts are not available. However, it can be noticed that the investors may have over reacted toward the stock market after CA election, though it does not mean that all the stocks are overvalued.

Siddhartha Capital is planning to launch another scheme soon. What are your plans to make the scheme perform better than SIGS1?

Yes, we are in the final stage of implementing the new scheme, which is again a five-year closed end scheme, but it will be equity-oriented fund with equity comprising g 70 percent of the fund while debt and other instruments covering the rest. Its basic size is Rs 80 crore, and the fluctuation would be between Rs 40 to 100 crore. We expect the final approval from the SEBON within a week or two, and we will launch the new scheme immediately thereafter.

Here I would like to emphasize that we shall always put equal effort for good perform of all our schemes. We will not have any bias on one scheme over another. Since our second scheme also invests in fixed income securities, the investment strategy may differ from the previous scheme. We have already developed research modality and system in our institution. We mainly rely on fundamental analysis since we take long-term investment horizon. We also perform technical analysis for the purpose of short-term trading of the stock and take benefits of short term volatility of the market.

For the new scheme, we have almost finished constructing portfolio based on risk and returns. We first implement that portfolio and after complete implementation, there will be certain review and changes as required depending on the market situation. We are very much prepared to meet the target forecasted by the scheme.

More mutual fund providers are in the pipeline though the market is quite small. Why do you think that so many banks are eager to launch their mutual funds?

Mutual fund is the essential element for the sustainability of the capital market in any country. The market may be small or big, the market may have sufficient investment opportunity or not, introduction of this industry gradually increases the depth of the market as it plays crucial role to increase confidence of both the issuers and investors. Introduction of different types of mutual fund products supports the integration of capital market and money market and thereby encourages the development of bond market.

In the current scenario, one can argue that there is less opportunity for investment in Nepalese capital market as there are very few sectors of the economy listed in the stock exchange. However, there is lot of potential for capital market development in Nepal along with the economic development. We have been noticing that power sector companies are gradually coming to the market. Likewise, other infrastructure projects are also talking about raising capital from capital market. There are equal chances that tourism and agro-industry will also use this venue to raise their capital requirement. We can expect this process to accelerate after the CA election and once the constitution is in place on time and stable government is there in the country.

In this outset, I think it is perfectly wise and relevant for preparing to play role in the capital market intermediation. Since, our mutual fund regulation allow only A class banks to operate mutual funds, I think it is obvious that some of the banks are preparing to operate mutual funds.

Here I would also like to inform everyone that Siddhartha Capital is already working on its third scheme, too.

Are you satisfied with the level of cooperation from the government and the regulatory bodies?

Regulators being in the front line understand the fundamentals of the market. That is why they also play the role of advisor to the government in this regard to bring market friendly policy based on international best practices. The market performs better when there is conducive policy and government and regulator are in position to address the market issues as soon as possible. Delay in bringing crucial policies sometime may be counterproductive to the market and that may have long run negative effect in the market.  In our context capital market regulator has provided so many feedbacks and suggestions to the government and many of its suggestions have been included in the national plans. However, we have long way to go and for that understanding and willingness of the government for the effective implementation of the plan is very important. So far as the SEBON is concerned, what I feel is it has been cooperating with market players from its level base.

What should investors look for before putting their money into a mutual fund? As an investor why, do you think, should I put my money into your scheme when I have a scheme offered by a bigger bank. How do I stand to profit from your scheme?

There are different levels of risks in different securities instruments. Investors should be able to analyze those risks and fit themselves in appropriate risk reward position and make their investments. In case of mutual funds also, based on its investment objectives, there are different types of schemes. Investors shall be able to position them in appropriate risk level. However, it should be noted that since mutual fund managers analyses the risk and reward of each investment, can take measures to minimize risk along with maximizing the rewards. Investing in mutual fund means getting expert management services relatively in low fee structure. Investors will have opportunities to buy a well diversified portfolio even with a small sum of money. They also may have tax benefits investing in mutual funds.

So, far as your question is concerned, why should an investor invest in mutual fund of small banks where there is offer from big banks, our mutual fund guideline has made clear provision to disclose in the scheme prospectus that performance of sponsor bank does not reflect the performance of the specific scheme. So, we need to see how specific fund manager is performing. Even within one mutual fund, we can find that one scheme is producing high returns while other is producing relatively lower return. This may be also due to risk return preference and investment objective of specific scheme.

With regard to small and big banks in the country, I don’t see there is significant difference in capital size of the banks. And also their access to and use of technology is almost similar. Even the human resources and expertise are moving from one another. One bank which we consider it last year as second tier bank is near to first tier this year, one which was in second tier has gone to third tier and one which was in third tier last year is in second tier this year. Besides, mutual funds have to perform independently and what it gets from its sponsor bank is the technology and expertise, which with regard to mutual fund we find almost similar. Therefore, what I want to say is it would not be fair or it would be too early to relate the mutual fund performance with the sponsor bank. Though it may be possible in the naïve market like ours is that people go for brands for subscription of the scheme.

How do you see Nepal’s capital market performing six months down the line?

Our capital market is mostly dependent on bank and financial sectors from both supply and demand perspective. Therefore, small changes in the policy by the central bank are highly influential.  So, we need to be very much alert toward the risk of policy changes by the central bank though we can expect that central bank will not bring policies that adversely affect the capital market and the investors.

However, we should not forget that our banking sector itself is also very fragile. Shifting of one thousand million rupees (Rs 10 arba) from one investment sector to another or investment opportunity of that amount for banking can create a significant liquidity imbalance in the country. And we are very much aware of the fact that how the situation has been influencing our capital market time and again. This is why we usually are unable to predict the performance of our capital market even for a very short period of time.

Can SIGS1 unit holders expect some sort of dividend from the profit you posted in the last fiscal year? When is Siddhartha Capital planning to hold its AGM?

Yes, SIGS-I investors can expect dividend of the last fiscal year as projected in its prospectus book. In the last fiscal year, this scheme has performed for six months. We are little late to announce that dividend as we have to clarify a minor issue with the regulator. I hope the issue will be clarified within a week, then we will finalize the scheme audit and announce the dividend of SIGS-I.

Nevertheless, what I can assure our unit holders at this point is that we will be providing a little more than the dividend we had pledged for the first year. As we had pledged 8 percent dividend in the first year, and as we are only six months into the operation, we will be providing more than 4 percent dividend soon.

Insofar as the AGM of Siddhartha Capital is concerned, our audit has been almost finalized and we are in the process to announce it shortly.