As Nepal’s capital markets continue to evolve, mutual funds are becoming a key tool for both novice and experienced investors, offering diversification and professional management that can help reduce risk and support informed decision-making, fostering reassurance and control.
Mutual funds offer an alternative, professionally managed pooled investment vehicle that provides access to a broad portfolio of stocks, bonds, and other securities. Understanding how mutual funds operate and their benefits can help investors and stakeholders feel more confident and capable in managing their investments, especially as the industry grows in Nepal.
What are Mutual Funds in Nepal?
In the Nepali context, a mutual fund is a professionally managed investment vehicle that gathers money from multiple investors and allocates it to a diversified portfolio of securities such as stocks and bonds.
Under Nepali law, these funds are regulated by the Securities Board of Nepal (SEBON) under the Mutual Fund Regulation, 2067 (2010), as amended, which ensures legal oversight and investor protection.
The value of units in a mutual fund is determined by the Net Asset Value (NAV), which is calculated by dividing the total market value of the fund’s assets by the number of outstanding units.
The NAV is the price at which investors can buy or sell units of the fund. Calculated at the end of each trading day, it offers transparency and helps investors feel more secure and informed about the fund’s performance.
Asset Management Companies (AMCs) licensed by SEBON manage these funds. These companies are responsible for making investment decisions on behalf of the fund, in accordance with the fund’s objectives and investment guidelines.
They conduct research, monitor market conditions, and adjust the fund’s portfolio to achieve its investment goals.
Their expertise and professional management are key reasons why investors choose mutual funds.
Investors purchase units of the fund rather than directly purchasing individual securities, thereby gaining exposure to a diversified portfolio without having to conduct security-by-security selection themselves.
Types of Mutual Funds in Nepal
Mutual funds in Nepal can be broadly categorised into two major types: open-ended funds and closed-ended funds.
Open-ended mutual funds are those that do not have a fixed maturity date and allow investors to buy and redeem units at the prevailing NAV.
In Nepal, open-ended funds are the most accessible vehicle for retail investors. They typically maintain a portion of their assets in liquid instruments (as per SEBON rules) to meet redemption demands.
These funds primarily invest in listed securities, though some may maintain a balanced portfolio of equities and debt instruments.
Minimum investment amounts are low (for example, as low as NPR 1,000), making them accessible to a wider investor base.
Closed-ended funds have a fixed corpus and a fixed maturity period, typically ranging from 3 to 7 years. These funds do not continuously offer new units and do not permit redemption prior to maturity.
Instead, their units are listed on the Nepal Stock Exchange (NEPSE) and can be traded in the secondary market, which means the market price may differ from the NAV (premium or discount).
These funds frequently adopt more concentrated strategies, often based on a specific sector or investment theme.
According to data from Stocks, there are currently approximately 43 mutual funds operating in Nepal, comprising 36 closed-ended and seven open-ended funds.
This indicates that closed-ended funds currently dominate the mutual fund landscape in Nepal, suggesting slower development of open-ended, retail-oriented mutual funds compared to other markets.
How do Mutual Funds Operate in Nepal?
- The investor submits capital to the Asset Management Company (AMC), which SEBON licenses.
- The AMC pools this capital along with other investors’ money and invests it in accordance with the fund’s stated investment objective and SEBON’s regulations, typically across listed stocks, bonds, and other instruments. Custodian banks safeguard these assets.
- NAVs are calculated (daily for open-ended funds) based on the value of underlying securities, accrued income, and expenses.
- For open-ended funds, investors may buy or redeem units directly at NAV through the AMC or its agents. For close-ended funds, units are listed on NEPSE and can be purchased or sold like regular shares, but the market price may not always equal NAV.
- The fund thereafter publishes regular reports, disclosures, and fact sheets so that investors can monitor performance and align with their investment goals.
SEBON’s regulations impose limits; for example, equity-oriented funds must invest at least 70% in listed securities, and a fund may not invest more than a fixed percentage in a single issuer, among other restrictions.
Benefits of Investing in Mutual Funds in Nepal
Mutual funds in Nepal offer several compelling advantages. One of the primary benefits is professional management.
Since AMCs handle research, stock selection, and portfolio maintenance, individual investors benefit from expertise they may not otherwise have.
Diversification is another key advantage. Since mutual funds pool resources from many investors, they invest in a variety of securities across sectors, reducing the risk inherent in investing in just one or a few stocks.
This is particularly important in Nepal, where a few large companies or sectors can significantly dominate the stock market.
Furthermore, mutual funds in Nepal lower the entry barrier for retail investors, as minimum investment amounts are modest (often just NPR 1,000 to NPR 10,000), allowing smaller investors to participate in professionally managed portfolios with small capital.
Regulatory oversight by SEBON adds another layer of investor protection, mandating disclosures of investment objectives, risk factors, expense ratios, portfolio composition, and historical performance.
Risks and Limitations of Mutual Funds in Nepal
Despite the advantages, mutual funds are not without risks, and investors in Nepal need to be aware of several specific challenges.
Market risk is a central concern, as many funds are equity-oriented and Nepal’s stock market (NEPSE) can be highly volatile.
Therefore, fund NAVs may decline significantly during downturns. For instance, in years of market stress, returns can be negative.
Liquidity risk is also a concern, especially for closed-ended funds, as they rely on secondary-market trading. Unit holders may find it difficult to exit early or at favourable prices.
In a small market like Nepal, trading volumes may be low, resulting in wider spreads or difficulty executing trades.
Management risk also exists, as the fund’s performance depends significantly on the fund manager and the AMC’s decision-making.
A less experienced manager or a poor strategy can underperform the market, negatively impacting investors.
Finally, because a significant portion of Nepali mutual funds are closed-ended, investors must be comfortable holding their investments to maturity and accepting the possibility that they may trade at a discount to NAV in the secondary market (i.e., liquidity and price risk).
Current Problems in Nepal’s Mutual Fund Industry
While the mutual fund industry in Nepal is growing, several issues remain that hinder its full potential.
As noted earlier, out of forty-three funds, thirty-six are closed-end funds, while only seven are open-ended funds. This imbalance means many investors cannot benefit from daily liquidity and may face challenges redeeming or trading early.
The market is skewed toward funds that are less flexible and more geared to institutional or long-term investors.
Because close-ended funds are traded on NEPSE, their units can trade at premiums or discounts relative to NAV.
In a small market with limited trading volume, liquidity may be low, affecting exit opportunities and resulting in unfavourable pricing for investors.
Nepal’s capital market remains concentrated in a few sectors (banking, hydropower, insurance).
This means that mutual funds, especially those with an equity orientation, are exposed to sector-specific risks and correlated market movements. The effect of macro-economic or regulatory shocks can therefore be high.
Many retail investors may not fully understand the differences between fund types, risk profiles, or the implications of trading at a discount/premium to NAV.
The fact that open-ended funds are few also means retail liquidity access is less than ideal.
Although SEBON’s regulatory framework is robust, operational issues such as delays in NAV publication, infrequent disclosures, weak investor protection mechanisms in practice, and the slow development of retail-oriented fund products persist. Recognising and addressing these issues will be critical for future growth.
Performance and Taxation Considerations
Historically, in Nepal, mutual funds have delivered mixed performance, with equity-oriented funds outperforming during bull markets but underperforming during bear markets.
According to one analysis, average annual returns for equity funds ranged from 12% to 18% in some years, compared with fixed deposits’ returns of 8% to 10%.
Nevertheless, the year-to-year variability is large, with some funds delivering over 30% in strong years and suffering negative returns (-15% to -20%) in weaker years.
Investors should therefore maintain realistic expectations and understand that higher returns often come with higher risk.
Conclusion
Mutual funds in Nepal represent a potent investment route for those seeking access to the capital market, offering professional management, diversification, and lower minimum entry points.
However, like any investment vehicle, they come with risk and require careful selection, patience, and awareness of the structural characteristics of Nepal’s market.
While the regulatory framework under SEBON is already in place and robust, the industry still faces challenges such as liquidity constraints, the dominance of close-ended funds, market concentration, investor awareness gaps, and operational bottlenecks.
Overcoming these will help mutual funds deliver more consistent benefits to investors and contribute to the broader development of Nepal’s investment ecosystem.
If you are looking to invest in mutual funds, start by reviewing and comparing the available open-ended and closed-ended schemes.
Check the AMC credentials, performance history, expense ratio, and how well each fund aligns with your investment horizon and risk appetite.
For those new to investing or unsure about which fund suits their goals, consider consulting a licensed financial advisor or investment professional in Nepal.
