Mutual funds are less risky than individual stocks: Evidence from Nepali secondary market

The significant purpose of mutual funds is observed to be diversification of risk. Mutual funds in international market are although considered in high demand; the Nepalese investors perceive it in two different ways. While there are investors who are the advocators of mutual funds, there are also investors who do not prefer these funds. But all in all, it is of essence to understand whether the mutual funds in Nepal have been able to minimize the risk of investors or not.

This article provides an insight on how investment in mutual funds has minimized the risk of investors even in the bearish trend.  In order to analyze this, comparison between NEPSE index and NAV of individual mutual fund has been made. Time period between Shrawan, 2073 and Chaitra, 2074 has been chosen for most of the mutual funds. However, due to unavailability of data for some of the mutual funds, the available date since operation has been selected. There are currently 13 mutual funds schemes listed in NEPSE namely, Global IME Samunnat Scheme-1 (GIMES1), Laxmi Equity Fund (LEMF), Laxmi Value Fund-1 (LVF1), Nabil Equity Fund (NEF), NIBL Pragati Fund (NIBLPF),  NIBLSF1 (NIBL Sambridhhi Fund), Sanima Equity Fund (SAEF), Siddhartha Equity oriented Fund (SEOS), NMB Hybrid Fund (NMBHF1), NMB Sulav Fund (NMBSF1), Citizen Mutual Fund 1 (CMF1), Siddhartha Equity Fund (SEF) and NIC Asia Growth Fund (NICGF). In the analysis, three of the mutual funds such as Citizen Mutual Fund 1 (CMF1), Siddhartha Equity Fund (SEF) and NIC Asia Growth Fund (NICGF) have been discarded as their operation period is short.

The provided table shows the change in NEPSE index on the left side and change in prices of mutual funds on the right side. The difference of change can be compared: 

Note:

The dividend includes the total dividend provided within the mentioned dates only and excludes total dividend since beginning.

Change in NEPSE: GIMSE1=(Index in 16^th Chaitra – Index in 14^th Shrawan)/Index in 14^th Shrawan

Change in NAV=GIMSE1=(NAV in 16^th Chaitra+Dividend/10)-NAV in 14^th Shrawan/NAV in 14^th Shrawan

Here is the bar graph representing the difference of the same:

GIMES1: Here, the NEPSE index has decreased by 35.02% from Shrawan, 2073 to Chaitra, 2074. But, mutual fund scheme GIMES1’s NAV has decreased by 24.48%. Its LTP stands at Rs 9.11.

LVF1: From Shrawan, 2073 to Chaitra, 2074, the mutual fund only lost 3.91% and further provided a total dividend of 50%. On the contrary, NEPSE lost 35.02%. LVF1 is seen to be doing better in terms of NAV compared to GIMSE1 over the same time period. Its LTP is Rs 11.03.

NIBSF1: NIBSF1 is the mutual fund of NIBL Capital. The mutual fund has done better than NIBLPF. In the time span 20 months, NIBSF1 has provided investors with 33% total dividend. Although NEPSE lost 35.02%, NIBSF1 lost about 21.67%. NIBSF1 has LTP of Rs 11.75.

SEOS: Here, the NEPSE index has decreased by 35.02% from Shrawan, 2073 to Chaitra, 2074. But, mutual fund scheme SEOS has decreased by 14.62%. SEOS has further provided a total dividend of 41% to investors. SEOS has LTP of Rs 11.8.

NMBSF1: NMBSF1 has distributed a dividend of 41.0563%. So, considering the NAVs, NMBSF1 has declined in terms of NAV by 17.06%. NEPSE lost 35.02% in the same time span. Its LTP stands at Rs 12.8. 

LEMF: Over the period of 20 months, NEPSE index came down by 25.27% however; the NAV of LEMF came down by only 14.87%. Its LTP stands at Rs 9.18.

NEF: While NEPSE has lost 28.22% from Kartik, 2073 to Chaitra, 2074; NEF lost 15.87%. This shows that investors in NEF faced less risk compared to investors investing in individual stocks. The LTP of NEF is Rs 9.15.

NIBLPF: NIBLPF, however has not been able to minimize its risk or investors as compared to the NEPSE index. NEPSE lost 16.75% in last 15 months whereas NIBLPF lost 21.95% due to its decreasing NAV. NIBLPF has LTP as Rs 8.8.

SAEF: Within last 15 months, NEPSE index changed by -14.30%. On the other hand, the NAV of SAEF changed by only -1.41%. The LTP of SAEF is Rs 9.57.

NMBHF1:NMBHF1, in the period of four months, saw a decline in NAV of 4.53% whereas NEPSE index saw a decline in 6.78%. Its LTP stands at Rs 9.49.

The provided analysis shows that although NEPSE might go in the bearish trend, the NAV of most of the mutual funds have comparatively fallen less than the individual stocks. The reason behind this can be diversified portfolio of mutual funds, professional expertise of mutual funds while selecting investment, and an in depth analysis of stocks. Thus, beginner investors with low seed money can purchase the mutual funds from NEPSE if they aspire for “low risk, low return”. Similarly, the risk minimization can be seen as a proof from the mutual fund schemes existing in Nepalese secondary market.

 (Disclaimer:  Any kind of information that is provided in the article should not be used as a sole advice or recommendation by investors in order to design their investment portfolio. So, before taking steps for any kind of the information, the investors are required to base their judgment on their own financial analysis, appropriateness of the information and seek independent financial advice. The information of the company has been taken from the authorized sources such as website of the company, NEPSE, financial reports and press releases of the companies so, any changes not updated in these may differ in the analysis.)