No open-ended schemes in sight

KATHMANDU, MAR 28:

Nepali capital market is not yet ready for open-ended mutual funds despite emergence of a couple of close-ended mutual funds.

“Close-ended mutual fund schemes have worked well in the Nepali capital market but the market still has to be more mature for open-ended schemes,” pointed out CEO of Siddhartha Capital Ltd — fund manager for Siddhartha Investment Growth Fund I — Dhurba Timilsina.

Open-ended mutual funds are more popular in countries with a developed capital market. Open-ended mutual funds do not have pre-determined amount of shares outstanding unlike close-ended mutual funds that have a fixed number of units issued. The size of the open-ended fund keeps changing depending on the demand in the market.

“At present, the capital market is at the mercy of political developments and fund managers cannot predict the redemption pressure so managing liquidity will be a great challenge for the funds if the political and economic climate is unfavourable,” he pointed out.

In open-ended schemes, fund managers buy back the fund units from investors based on net asset value when investors wish to sell them. Close-ended schemes are publicly traded in the stock market between investors, but in open-ended schemes investors purchase and sell units directly to the fund managers. “If a lot of investors come to liquidate their units in an open-ended scheme due to an unfavourable political scenario, the portfolio of fund managers will have to undergo a fire sale at less than the optimal price,” he said.

Siddhartha Investment Growth Scheme I, launched in November, 2012, was listed in January 2013 at Nepse. The fund, worth Rs 500 million, is a close-ended scheme with a five-year tenure.

Likewise, the recently launched Nabil Balanced Fund I, worth Rs 750 million, is also a close-ended scheme with a five-year tenure.

Siddhartha Capital is preparing to bring another close-ended scheme worth Rs 300 million soon instead of opting for open-ended options.

Open-ended schemes are preferred by investors for its high liquidity that allow investors to offload units at minimum redemption fee unlike in close-ended schemes that require secondary trading at Nepse. Mutual Fund Guidelines 2068 has also spelt out conditions for close-ended mutual fund issuance and its valuation.

“If the regulation or guidelines introduce provisions such as lock-in period for initial phase even for open-ended ones or authorises fund managers to levy higher exit commission for a certain time period to discourage early exit, Nepali mutual fund managers might launch open-ended schemes as well,” he added.

CEO of Nabil Investment Banking — fund manager for Nabil Balanced Fund I — Pravin Raman Parajuli said the market is not mature enough to handle open-ended schemes. “In absence of tax incentives and scope for portfolio diversification, investors are also comfortable with close-ended schemes due to ensured dividends,” he said.

Source: THT