Introduction of Mutual Fund

A mutual fund is a form of collective investment that collects money from investors and invests

the money in stocks, bonds, short-term money-market instruments, and/or other securities. The

fund manager trades the fund's underlying securities, realizing a gain or loss, and collects the

dividend or interest income. The investment proceeds are then passed on to the individual

investors.

One of the main advantages of mutual funds is that they provide small investors access

to professionally managed, diversified portfolios of equities, bonds and other securities, which

would be quite difficult to create with a small amount of capital. Each shareholder participates

proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can

typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per

share, which is sometimes expressed as NAVPS.

Mutual Fund in Nepal

The history of mutual funds companies in Nepal started with the flotation of NCM First mutual

fund 2050 by NIDC Capital Markets in 1993. In 2059, NIDC Capital Markets again floated

NCM Mutual fund 2059, with NIDC as the trustee. Citizen Unit Scheme were also floated in

between which was managed by Citizen Investment Trust.

Recently, different commercial banks are interested in the mutual fund companies after the new

regulations that allowed commercial bank to sponsor mutual fund companies. Siddhartha Capital

has already issued NFO while, NABIL investment, NMB, Laxmi Bank are also lined up to enter

in Market.

Problem Statements

After the issuance of Mutual Fund Regulation, 2010 by SEBON, "A” class commercial banks

started registering mutual funds. Siddhartha Mutual Fund is the fund registered by Siddhartha

Bank Limited (SBL) with SEBON, which is the first mutual fund as per the regulation. For the

operation of various schemes under Siddhartha Mutual Fund, SBL has established Siddhartha

Capital Limited (SCL) as the fund manager and depository. In addition, different Mutual Fund

Companies are lined up to issue New Fund Offering (NFO).

However, these companies are expected to attract institutional investors only due to the lack of

awareness about Mutual Fund among the individual investors. Further, as a result of minimal

number of listed companies and as an effect of concentrated securities of Banking and Financial

Institutions (BFIs), Nepalese Capital Market lacks diversification. Due to this reason, Mutual

Fund Companies may be compelled to buy its own sponsors’ shares. In the context of Nepal, the

transaction costs with the regulators seem to be high as well. Hence, it may restrict the Mutual

Fund Companies to provide higher return to the investors.

Overall Objectives

To assess individual investors’ knowledge about Mutual Fund.

To compare transaction cost of Mutual Fund regulators of Nepal and India.

To identify the impact of lack of diversification in Nepalese Stock Market on Mutual

Fund.

To study the conflicting legal provisions regarding investment in foreign countries by

Mutual Fund.

Methodology

Secondary Data/Information: Secondary data/information will be gathered from

relevant websites of different Mutual Fund Companies, regulators, and books.

Introduction to the Mutual Fund

There are lots of investment avenues available in the financial market for an investor with an

investable surplus. It may be Bank Deposits, Stocks, Bonds, and T-bills and so on. Investing in

stocks means high return compared to other means, but it is also accompanied by risks. Many

people, generally, the small investors don’t have much idea about investments. Therefore, if

those investors find someone who would invest on their behalf, life would be easier for them.

Mutual Fund is an investment vehicle that is made up of a pool of funds collected from many

investors for the purpose of investing in securities such as stocks, bonds, money

market instruments and similar assets. Mutual funds are operated by money managers, who

invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

A mutual fund's portfolio is structured and maintained to match the investment objectives stated

in its prospectus. 

One of the main advantages of mutual funds is that they give small investors access

to professionally managed, diversified portfolios of equities, bonds and other securities, which

would be quite difficult to create with a small amount of capital. Each shareholder participates

proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can

typically be purchased or redeemed as needed at the fund's current net asset value (NAV).1 

Generally, there are two types of mutual fund and they are discussed below:

1. Open-end Mutual Fund: Most mutual funds are open-end funds, which sells new shares

continuously or buys them back from the shareholder (redeems them), dealing directly

with the investor (no-load funds) or through broker-dealers, who receive the sales load of

a buy or sell order. The purchase price is the net asset value at the end of the trading day,

1 Investopedia

which is the total asset of the fund minus its liabilities divided by the number of shares

outstanding for that day.

2. Close-end Mutual Fund: A closed-end mutual fund sells shares of the fund in an initial

public offering (IPO). After the offering, no more shares are created or redeemed.

Therefore, less money is needed to manage the fund, since there is no need to deal

directly with individual investors, such as sending periodic statements, and it also

eliminates the need to redeem shares to pay investors who want to cash out, such as

occurs in open-end mutual funds. Consequently, a closed-end fund can be more fully

invested, since it doesn’t need much cash, and it is more tax efficient.

Benefits and Drawbacks of Mutual Funds Investment

The pros and cons may vary from country to country, along with the type of mutual fund,

performance of the fund manager, government regulations and so on. Yet there are some general

benefits and drawbacks of mutual fund investment which are explained below.

Broadly, following are the advantages of mutual fund.

Professional Management: Mutual funds give a small investor a chance to invest a low

amount in a professional manner. It is not feasible for small investments to be managed

professionally, on an individual level, because of low capital and low returns for the

managing company. Once you decide on a mutual fund to take care of your investment,

all these charges can be avoided. You needn't be an expert in trading or market analysis

for making an investment. A professional fund manager makes decisions on behalf of

every small investor who put in money through the firm.

Diversification: A good investment practice involves diversifying the proportion of

investment in different stocks and bonds. It provides the option to hold a number of

securities and reduce the risk of losing money, which is not subject to the volatility of a

single stock.

Low Transaction Costs: If you want to make an individual investment, it would involve

a large transaction cost. On the other hand, a mutual fund involves a large amount of

capital to be traded. Therefore, it bears a small transaction cost which eventually

translates into a small transaction fee to be paid by an investor.

Liquidity: Mutual funds allow liquidity of assets within a short period. Close end funds

may trade below or above NAV, where the investment recovered depends on the NAV of

the security invested into. But generally the entire investment can be regained in two

business days for open ended funds.

Low Initial Costs and Service: No-load mutual funds, which are a part of open-ended

mutual funds, do not require transaction costs. An open-ended fund can be bought or sold

with no premium or sale charge associated with it.

Despite of all the above merits for investing in mutual fund, there are some disadvantages as well

which are mentioned below.

High Costs and Risks: Mutual funds require a detailed study of the investment options

as the fee charged by the management firm can be quite high. The main costs that come

along with buying a mutual fund is the management fee that is usually around 1.0% to

1.75% per year for a stock mutual fund. In addition you’ll have some operating fees that

together with the management fee pay for the fund’s management expenses. On top of

that you may incur sales commissions when buying a fund, account service fees and a

redemption fee when selling it. Some funds also charge a 12b-1 fee which is an annual

marketing or distribution fee for the fund.

They are subject to market risks or assets risk as well. If the investment is not sufficiently

diversified, it may involve huge losses.

Tax issues: Although, the returns on investments are quite high, a mutual fund cannot

guarantee lower tax bills. The tax amounts are usually high, especially in case of short-

term gains. Moreover it is the fund manager who handles these issues and you cant

dictate terms on the amount of tax to be paid.

Investor issues and company profile: In case of repeated investments by new entrants,

the value of shares owned by current or existing investor decreases significantly. Also, a

mutual fund requires a deep and long term analysis of the amount of investment and its

potential investment areas. If the company fund managers are changing regularly, it may

adversely affect the returns on your investment. Frequent changes in job position may

affect as well.

No Insurance / No Guarantee: Mutual funds, although regulated by the government, are

not insured against losses and also do not guarantee any positive performance during the

time you are invested in it. This means that despite the risk-reducing diversification

benefits provided by mutual funds, losses can and will occur, and it is possible (although

extremely unlikely) that you could even lose your entire investment. Investing of all sorts

usually bears some risk and mutual funds, especially when investing in stocks, are a risky

investment product. Obviously this is not greatly talked about, but it should be clearly

brought to everyone’s attention before investing any money.

Purpose of the Study

The main purpose of doing this project is to know about the mutual fund and it’s functioning in

Nepal taking Indian Mutual Fund as a benchmark. Finding answers to some questions as stated

underneath is our whole motive.

What were the crucial problems and threats that Indian Mutual Fund faced during the early

stages?

What were the impacts of these threats on the Indian investors?

How did investors react to this problem and what action plan did Indian Mutual Funds

prepare to mitigate this problem?

What lessons can be learnt from the action plan taken by Indian Mutual Funds?

How will Mutual Funds in Nepal react if they happen to face similar problems and threats?

How strong is the Nepalese Mutual Fund Regulation designed and supportive to respond to

this problem?

Apart from digging answers to the above questions, our study have also focused on the main

limitations of mutual fund in Nepal which has been a greatest reason for the mutual fund

industry not in its full shape. Those limitations are particularly:

Lack of diversification in Nepalese market.

Higher transaction fees

Research Methodology

To carry out the this project work, secondary data are used.

The secondary data were collected through various sources from the internet. The JSTOR was

used for the literature review and other web was used to know the basic of mutual funds, Indian

mutual market, and also international markets.

Literature Reviews

Differences in fees charged by mutual fund companies across different countries

To assess whether any country's fees are too high, it is useful to put its fees into a global

perspective. Some countries have stronger legal systems and regulations that more explicitly

protect investor rights. Some countries house larger industries. Some countries have wealthier

and more educated populations. Some countries, like the United States or Canada, effectively

close their borders to funds domiciled in other countries. In contrast, European nations have open

borders, enabling foreign fund promoters to more easily offer funds in many countries. Many of

these imported funds are located in international fund centers, such as Luxembourg and Dublin

or various island domiciles, such as the Cayman Islands. These characteristics are highly related

to the conclusion of a concrete amount of fees.

Fees are lower in countries whose judicial systems are superior, where there are regulations

requiring an independent custodian, and where there are rules requiring funds to obtain certain

approvals. These results apply to the country where the fund is domiciled and where the fund is

offered for sale. Management fees are lower in nations with higher per capita GDP, a more

educated population, an older and smaller domiciled fund industry, and a less concentrated

banking sector (or one where banks are not allowed to enter the securities business). The positive

relationship between fees and the size of the domiciled industry and the negative relationship

between fees and industry age also hold for expense ratios and total shareholder costs.

Not surprisingly, fund fees vary across investment objectives. Larger funds and fund complexes

charge lower fees, as do index funds, funds of funds, and certain funds selling cross-nationally.

Funds that sell to institutions and larger accounts have lower fees. Fees are higher for funds

distributed in more countries funds domiciled in off-shore locations, and funds sold by fund

management companies whose ultimate parent is domiciled abroad. Substantial cross-country

differences persist after controlling for these variables.

Mutual Fund in India

Unit Trust of India (UTI) was the first mutual fund set up in India in the year 1963. In early

1990s, Government allowed public sector banks and institutions to set up mutual funds. UTI has

an extensive marketing network of over 40,000 agents all over the country.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The

objectives of SEBI were to protect the interest of investors in securities and to promote

the development of and to regulate the securities market.

In 1995, the RBI permitted private sector institutions to set up Money Market Mutual

Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial

paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated

government securities having unexpired maturity up to one year.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to

protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993.

Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital

market. The regulations were fully revised in 1996 and have been amended thereafter from time

to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the

interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those

promoted by foreign entities are governed by the same set of Regulations. There is no distinction

in regulatory requirements for these mutual funds and all are subject to monitoring and

inspections by SEBI. The risks associated with the schemes launched by the mutual funds

sponsored by these entities are of similar type.

The Mutual Funds originated in UK and thereafter they crossed the border to reach other

destinations. The concept of MF was initiated only in the later part of the twentieth century in

1960s for a more lively mobilization of household savings to provide investible fund to industry.

The idea of first mutual fund in India was born out of the far sighted vision of Sri T.

Krishnamachari, the then finance minister. In July 1963, the concept of mutual fund originated in

India when Unit Trust of India (UTI) was established with the twin objectives of mobilizing

household savings and investing the funds in the capital market for industrial growth. In 1964,

UTI came up with the first mutual fund Unit Scheme, 1964 (US-64) which was the first open

ended balanced fund.

The mutual fund industry, in India, has appeared as a leading financial intermediary in Indian

capital market. As of December 2012, the industry comprising of 43 Asset Management

Companies managed financial assets of Rs. 755,894.86 crores.2 Majority of the funds (96%) are

open-ended type and the remaining (4%) of the funds are close-ended type.3 The assets have

grown at a compounded annualized growth rate of 48 per cent over a period of four decades

(1965-2005).4 This shows the growing popularity of mutual funds in the country. The notable

growth can be credited to the entry of commercial banks and the private players in the mutual

fund industry along with the rapid growth of the Indian capital markets.

The remarkable growth of mutual funds in India has influenced the retail investors to invest their

surplus funds with different schemes of mutual fund companies with or without complete

understanding of Mutual Funds (MF). Further, it has attracted the alertness of Indian researchers,

individuals, and institutional investors over the years. The Indian mutual fund industry is no

exception and the competition would intensify in the coming years as it happened in other

industries.

Evolution of mutual funds in India:

In India, the mutual fund industry started in 1963 with the formation of Unit Trust of India

(UTI). It was started with the initiative of the Government of India and Reserve Bank, which

enjoyed its monopoly and supremacy till banking sector mutual fund came into operation in

1987. The history of mutual funds in India can be broadly divided into four different phases. The

first three phases can be viewed as pre crisis period.

First Phase (1964-87): UTI was established on 1963 by an Act of Parliament which was set up

by the Reserve Bank of India (RBI) and functioned under the regulatory and administrative

control of the RBI. In 1978, Industrial Development Bank of India (IDBI) took over the

2 www.mutualfundindia.com3 Ray Sarbapriya, Mutual Fund in India: An Analysis of Performance and Some Emerging Issues in Unit Trust of India, 20114 www.amfi.com

regulatory and administrative control in place of RBI. The first scheme launched by UTI was

Unit Scheme 1964 (US-64). Thus, Phase I initiated with the establishment of UTI and the launch

US-64. At the end of 1988 UTI had Rs. 6,700 crores of assets under management.5 During this

phase, UTI was the only institution offering mutual fund products and it experienced a consistent

growth. By June 1987, it had about 2 million investors. During this phase, US-64 became

progressively more popular as an option to bank deposits. In 1986, the equity growth fund was

launched. This was the first product in India to provide a medium for the entry of small investors

into the equity market and proved to be a splendid marketing achievement. Further, 1986 also

saw the start of India Fund, the first Indian off-shore fund, which was targeted for overseas

investors. Also, it was listed on the London Stock Exchange.

Second Phase (1987-1993): Phase II was dedicated mainly to the entry of Public Sector Funds.

The impressive performance of UTI especially on the first and largest open ended scheme, i.e.

US 64 had given the investing public a rich familiarity of the mutual fund’s operation. In 1987,

the monopoly of UTI came to an end when Government of India permitted Commercial Banks,

Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC) to

set up mutual fund by amending Banking Regulation Act and Insurance Act. However, the

dominance of different schemes of UTI in terms of aggregate investment, earning power, fund

mobilization, dividend payment, equity investment, and capital appreciation was much more than

any other mutual funds up to 1997 due to efficient asset management. In 1987, the entry of non-

UTI was marked with Public sector mutual funds put up by public sector banks, LIC, and GIC.

SBI Mutual Fund, established in June 1987, was the first non-UTI Mutual Fund. It was followed

by Canbank Mutual Fund (December 1987), Punjab National Bank Mutual Fund (August 1989),

Indian Bank Mutual Fund (November 1989), Bank of India (June 1990), Bank of Baroda Mutual

Fund (October 1992). In addition, LIC instituted its mutual fund in June 1989 while GIC

launched its mutual fund in December 1990. At the end of 1993, the mutual fund industry had

assets under management of Rs. 47,004 crores.6 To conclude, Phase II saw the beginning of

competition in the mutual fund industry with the set up of mutual funds by subsidiaries of the

nationalized banks and of the two insurance corporations, i.e. LIC and GIC. During this phase,

there was a spectacular growth in the size of the mutual fund industry. This was proven with 5 www.amfiindia.com

6 www.amfiindia.com

investible funds increasing to Rs. 53,462 crores (market value) and the number of investor

accounts increasing to over 23 million. The optimistic equity markets in 1991-92 and tax benefits

under Equity-linked Savings Schemes increased the attractiveness of equity funds.

Third Phase (1993-2003): Phase III witnessed the entry of Private Sector Funds with which a

new era started in the Indian mutual fund industry. As a result, Indian investors had a wider

choice of fund families. In 1993, the first Mutual Fund Regulations came into existence under

which all mutual funds (except UTI) were to be registered and governed. The former Kothari

Pioneer, now merged with Franklin Templeton, was the first private sector mutual fund

registered in July 1993. The 1993 Securities and Exchange Board of India (SEBI) Regulations

for mutual fund were substituted by a more comprehensive and revised Mutual Fund Regulations

in 1996. Hence, the industry now operates under the SEBI (Mutual Fund) Regulations1996.

During this phase, many foreign mutual funds launched funds in India and there were numerous

mergers and acquisitions. As a result, the number of mutual fund houses went on increasing. At

the end of January 2003, there were 33 mutual funds with total assets of Rs. 121,805 crores and

the investible funds of the industry increased to Rs. 78,655 crores with the number of investor

accounts increased to 50 million.7

Fourth Phase (2003 and onward): In the initial years of Phase IV, there was significant growth

in the mutual fund industry helped by a more positive response in the capital market, major tax

benefits, and enhancement in the quality of investor service. Investible funds rose to over Rs.

110,000 crores (market value) with UTI having 68% of the market share.8 During the year 1999-

2000, sales mobilization reached a record level of Rs. 73,000 crores as against Rs. 31,420 crores

in the preceding year.9 However, the trend had sharply inverted in 2000-2001 and investible

funds have declined. As a result, there have been significant declines in the NAVs of funds.

The graph indicates the growth of assets over the years.

7 Ibid8 www.amfiindia.com9 Ibid

Limitations of Mutual Fund in India

In comparison to the degree of growth and development of mutual funds in developed economies

like USA, U.K., Japan, and Australia, Mutual Fund in India is in adolescent stage. Mutual fund

in India have not been able to perform up to the expected level and in many cases, have

expressed their financial failure to repay the invested capital along with promised rate of returns.

Major problems faced by Indian Mutual Funds are as following:

1. Problems Related to the Investors awareness

UTI has established a marketing network of branches, chief representatives, collection

centers and franchise offices throughout the country which is its strength as compared to

other mutual funds. However, all other mutual funds could not establish such a marketing

network and can’t compete with UTI in mobilizing public savings from rural and semi-

urban areas. This is mainly due to lack of awareness and poor after sales service to the

investors. The investors from rural and semi-urban areas still believe that the mutual

funds promoted by UTI, LIC, and nationalized banks are guaranteed by the Central

Government which is not the case in real. The majority of the new investors don’t know

the concept, functions and merits of investment in mutual funds before investing. The

researcher had undertaken surveys of individual investors and members of Ahmadabad

Stock Exchange to analyze the awareness of investors about the mutual fund schemes. It

was observed that small businessmen, farmers and persons belonging to rural and semi-

urban areas in low income group had no awareness about the mutual funds.10

2. Problems Related to Performance

The schemes are outlined and conceptualize by the top management of the mutual funds

and marketed by their branches and through the agents. The agents and the sales

executives of the mutual funds promise higher returns to the investors and spread a bright

picture about the mutual funds while marketing schemes. As a result, the mutual funds

have been wrongly promoted to a certain extent. The ignorance of the investors about

mutual funds coupled with aggressive selling by promising higher returns to the investors

have resulted into loss of investors’ confidence due to inability to provide higher

returns.11 The agents of mutual funds are more directed by commissions they get for

selling the schemes and not by the requirements of the investors and quality of the

products.

3. Inadequate Research

Most of the Indian mutual funds are suffering due to lack of adequate research facilities.

Most of the funds depend on external research and have no facilities for in-house

research.

4. Poor Risk Management

10 Mehru, K.D., Problems of Mutual Funds in India11 Mehru, K.D., Problems of Mutual Funds in India

According to a recent survey by Price Waterhouse Coopers, about 50% of the mutual

funds are not managing risk properly and another 50% do not have documented risk

procedures or dedicated risk managers.12

5. No Rural Sector Investment Base

Indian mutual funds so far have not been able to create rural sector investment base.

Sufficient efforts have not been made to educate the potential investors.

6. Increased Competition

The number of asset management companies is increasing and various schemes provided

by them have increased competition. Thus, mutual fund seems to be too busy trying to

race against each other. As a result, they lose their stabilizing factor and strengths in the

market.

7. Lack of Transparency

Transparency is another area where Indian mutual funds are lacking. Investors have right

to have the information about where and how the investor’s money has been deployed.

But investor’s are deprived of getting the information.

As a result of all the above problems of mutual funds in India, the investors’ interest towards

mutual fund has deteriorated.

Limitation of Mutual Fund in Nepal and its comparison with India

12 www.mywhatis.com

Operating Cost

Operating expenses are costs incurred by the mutual fund in operating the portfolio which

includes administrative expenses and advisory fees paid to investment manager. Mutual fund

holder don’t receive an explicit bill for these expenses, however, these expenses are deducted

periodically.

In addition to the operating cost, cost incurred for the New Fund Offering (NFO) also plays vital

role. Cost of NFO in Nepal is comparatively high than India. Indian Mutual Fund Company has

advantage in terms of their large size. Therefore, underwriter charge is more for Nepalese

company. In addition, trading cost of Nepal Stock Exchange (NEPSE) is also high. Though it is

about to incorporate CDS and other technologies which may reduce cost, cost of transaction is

high till date.

This sort of problem is prevalent in the countries where capital market is least developed. In case

of India, trading and underwriting charge is not a headache for mutual fund companies because

of availability of large number of underwriting companies and big size of mutual fund.

Fees

Fees under different heading are charged by regulator of respective country. Fees create another

hindrance for mutual fund companies to provide sound return to investors of mutual fund.

India (NRs) Nepal (NRs)

Application fees 160000 50,000

Registration Fees 4000000 1000000

Approval Fees Up to 8000 Million

(NRS)

0.005% Up to 1000 Million 0.20

8000-16000 Mllion 0.007%-0.0035% 1000-5000 million 0.15

16000-48000 Million 0.0045% - 0.0015% Above 5000 million 0.10

License Fee Fund Manager NA Fund Manager 200,000

Depository NA Depository 50,000

Renewal Fee Fund Manager NA Fund Manager 100,000

Depository Depository 25000

(Note: Amount converted to Nepali Rupees)

Above table shows the comparison between the costs to be paid for regulator of India and Nepal.

Though the application fees and license fees of India seems to be fairly high, per unit cost will be

minimal compare to the size of NFO of Nepalese mutual fund companies.

Approval cost of mutual fund in Nepal is very high compared to approval cost of India. If a

Nepali Mutual Fund company wants to issue NFO of Rs. 800 million, it has to pay 20 times more

than that of Indian Mutual Fund Companies.

In addition, limit of other expenses provided by SEBI and SEBON also shows superiority of

Indian mutual fund companies. Total Expense Ratio permissible as per SEBI Regulations is

maximum 2.5% for equity schemes and 2.25% for debt schemes which is based on the Assets

Management of the scheme. This ratio includes the expense of Management Fees, Trustee Fees,

Custodian Fees, R&D Fees, Investor Communication Costs, Marketing and Advertising

Expenses and Audit Fees.

On contrary, in Nepal, a mutual fund companies can charge 2% as management fees, 0.5% as

depositary fees and 0.5% as supervisory fees. Total of 3% fees in Nepal does not include cost of

R&D Fees, Investor Communication Costs, Marketing and Advertising Expenses and Audit

Fees. Limit for management fees is capped by SEBI to 1.25% of net assets less than Rs. 100

crores, and 1.00% on Net Assets more than Rs. 100 crores compared to 2% of Nepalese

company.

This problem, again, is prevalent in countries where capital market is least developed. In Nepal,

we can expect it to be reduced when mutual fund markets get bigger.

Diversification of Stock Market

Diversification means to invest in multiple stocks across different market segments, instead of

putting all of your money into a single stock or single market segment. Diversification can be

accomplished in a few ways; either by purchasing multiple stocks in different segments, by

investing in an index fund that spans market segments or via mutual fund diversification.

India* Nepal

No. of Listed Companies 1600 244

No. of Stock Exchange 2 1

Market Capitalization (as

23rd Jan 2013

9,865,621 millions 498,238.83 Millions

Index

No. of Industries/Sectors 72 9**

*India’s data are based on National Stock Exchange (NSE)

** No. of sectors base upon the indices of stock exchange

Though there is no rule of thumb for number of industries/number of stocks for the proper

diversification of portfolio, Nepalese markets seem significantly small to have diversified

portfolio. Around 76% of stocks of NEPSE are from banking industry. Indian Mutual Fund

companies can invest in 72 different industries while NEPSE is limited to banking, hydropower,

trading, telecommunication, and construction industry only. National Stock Exchange (NSE) of

India provides large array of alternative ranging from banks, pharmaceuticals,

telecommunication, steel, automobile etc. Fund manager can make portfolio in such a way that

reduces the risk while optimizes return when large number of stock from diversified industry. In

case of Nepal, unsystematic risk of portfolio can be very high given the lack of diversification.

Lack of Clear Regulation

There are some loopholes in regulations of mutual fund. According to the Mutual Fund

regulation 2067, mutual fund companies can invest up to 25% in foreign capital markets.

However, no clear guidelines and instruction is provided in law, which has limited mutual fund

companies for having diversified portfolio. International diversification is also one risk

management technique.13 Financial theory made it clear that portfolio international

diversification has been the best way to increase portfolio earning and reduce global risk, notably

systematic risk.14 This limitation can be considered as unique limitation in Nepal, though some

critics believe that Indian rules regarding mutual fund is not adequate.

Awareness to Individual Investors

Mutual fund is still new vehicle of investment for investors. Though NCM mutual fund was

issued almost two decades back, this industry has yet to get momentum. Large proportion of

individual investors is still unaware about existence of mutual funds. Though we are unable to

get exact information about proportion of individual investors, media had reported about 30% of

individual investors invested in the NFO of Siddhartha Mutual Fund. In case of India, proportion

of individual investors is more than 90%. Though people of rural village are not aware about

this, people from top tier cities knows about mutual fund. In Nepalese context, Mutual Fund

companies should target the small investor. Due to the small size of Nepalese Market, Mutual

Fund companies are not in a position to invest in sector wise scheme.

Future prospect of Mutual Fund companies in Nepal

Given the limitation in Nepalese scenario, Nepalese Mutual Fund Companies will not have easy

days. Lack of knowledge among investors about mutual funds is one of the major problems. If

many mutual fund companies come into the market, they may face problems of issuing NFO.

From the experience of performance of Siddhartha Mutual Fund and upcoming mutual fund

companies, public will decide whether to invest in mutual funds or not. Cost of mutual funds

seems very high. This may obstruct the mutual fund companies to provide their target return.

In addition, lack of diversified industries in capital market may also plague the mutual fund

companies. They may face difficulty to make proper portfolio which provides optimum return at

minimum level of risk.

Despite of the limitation of mutual fund in Nepal, it can attract lots of individual investors and

help to stabilize Nepali capital. Since institutional involvement in Nepalese stock market is very

low, entrance of different mutual fund companies can reduce the power of speculator.

13 Gupta and Donlevvy, 200914 Gellai, M. I, Stock market volatility and International diversification

Recommendations

Cost reduction of regulator

Stock market should be equipped with advanced technology, which would help to reduce the

cost of trading and adds more facility to stockholder

Government should promote business of others sector to come in Nepalese capital market

Economic growth on modern economy hinges on an efficient financial sectors that pools

domestic saving and mobilizes foreign capital for productive investment. ((((Geert

Bekaret,,Stanford University)