Why should you invest in the Mutual funds ? Know the advantages of investing in mutual funds

Fri, Nov 23, 2018 12:50 PM on Mutual Fund, Recommended, Stock Market,

Mutual funds are a fund created from the general public capital to invest in a different instrument and majorly in the stock market. Mutual funds are one of the best investment instruments celebrated all across the globe. However, in Nepal, it is in the developing phase and there are only a few mutual funds which are traded in Nepal stock exchange.

Mainly, there are two types of mutual funds.

  1. Close-end mutual fund: They issue a certain number of shares for a particular period of time. They cannot increase or decrease the number of shares after the issue. Closed-end mutual funds will mature on the predefined period. Its price is determined by supply and demand. Closed-end mutual funds are traded in exchange.
  2. Open-end mutual funds: They can increase or decrease the number of shares according to the requirement and they don’t have a maturity period. Its price is determined by NAV. Open-end mutual funds are not traded in exchanges

Here in this article, we will talk about the closed-end mutual funds only.

In Nepal, one unit of closed-end mutual fund's share has a face value of Rs 10 and investor have to apply for a minimum of 100 unit shares. Here, mutual funds are regulated by SEBON and there are rules and regulation for them. 

We can separate the establishment and operation of mutual funds in the following four categories

  1. Fund Sponsor: They developed the mutual funds after getting approval from SEBON and they have to supply 20% of total mutual fund's capital. Fund sponsors are usually a commercial bank.
  2. Fund Manager: They supervised and managed the fund. A fund manager is usually 'capital market' a subsidiary of the respective bank. However, any institute who have a licensed for performing fund management can be a fund manager.
  3. Fund Supervisor: They are a group of individual that would be recruited by fund sponsor. As suggested by the heading they are supposed to perform supervision operation on mutual funds.
  4. Depository: They provide a comfortable depositing and withdrawing facility to mutual funds.

What are the benefits of Mutual Funds?

Mutual funds are wonderfully diversified among different investment instruments:

The above table shows the investment of Siddartha Equity oriented scheme. SEOS have invested Rs 62.62 crore in a listed stock of NEPSE, the Company had invested Rs 10 crore in banks deposit, Rs 3.2 crore is invested in Bonds/Debenture and around Rs 3.9 crore is invested in primary issues.

The company has kept non-earning cash of Rs 23.02 crore and a mutual should not keep this much amount as cash. However, we should not conclude anything just by looking at single month data.

The total investment of SEOS stands at Rs 79.72 crore.  If we buy a SEOS mutual funds of worth Rs 10,000 then we can say that around Rs 7,800 out of 10,000, is invested in equity, around 12.5%  that is Rs 1,250 is invested in bank's deposit, around Rs 400 is invested in bonds/debenture and around Rs 500 is invested in primary shares (IPO/Bonus/right share).

If I want to invest in all these investment instruments with Rs 10,000 then it would be impossible but with a mutual fund, we can diversify our investment portfolio and manage our risk.

SEOS has invested in 37 securities in the secondary market including other mutual funds in the month of Bhadra. That means, Rs 7,800 out of Rs 10,000 has been invested in 37 different securities and by simply taking a mean value we can say that Rs 210 is invested in each security. Mutual funds do distribute a cash dividend to its shareholders.

For managing our fund, mutual fund authority charges around 2% of total asset of the fund capital.

Managed by highly professional:

The qualification of a Fund Supervisor shall be holding at least Master's degree in the field of economics or commerce or finance or accounts or management or commercial law from a recognized educational institution or be a certified chartered account or having qualification similar to that and have minimum fifteen years of experience in the field of finance, industries, commerce, accounts, law or capital market. (Paragraph is taken from SEBON)

An experience of 15 years is huge and in that period they had to go through a period of high volatility, low volatility, strong bull market, strong bearish market. They know how to manage and diversify funds in different periods in the market.

One major disadvantage of closed-end mutual funds is that we have to exit the market irrespective of the market trend. If our mutual funds get matured in the bear market then we will get a comparatively low return.

The best part of closed-end mutual funds is that we can buy new mutual funds at a good discount rate. Mutual funds in Nepal are given priority in primary issues. Every company that is going public had to allocate 5% of the total IPO issue to Mutual funds.

The two matured mutual funds Nabil Balance Fund 1 and Siddartha Investment Growth scheme have given an annual return of 12.22% and 16.08 %. Nabil Balance Fund 1 was matured during the strong bear market in 2018 and that of Siddartha Investment Growth Scheme is matured in the bearish market of 2017. However, they managed to provide a good return.