Mutual Funds, An Attractive Financial Instrument: NIBL Ace Capital Deputy GM Dhungana

Article by Sachindra Dhungana.

Securities market investment has become very lucrative in recent days. However, not all investors have proper knowledge about the stock market and cannot select suitable investment opportunities. One of the easiest solutions to these problems is investing in mutual funds. Mutual funds are pooled funds that collect funds from various investors and invest the amount in securities like bonds, stocks, etc.

Mutual funds can be broadly divided into two kinds i.e. Open-ended Mutual funds and close-ended mutual funds. Close-ended mutual funds are those funds that issue a fixed number of shares through NFO with a fixed maturity date whereas open-ended mutual funds are those funds that do not have a fixed maturity period and fixed number of shares.

In Nepal, the concept of mutual funds began with the introduction of NCM mutual funds in 1993 A.D. (2050 B.S.) and gained its popularity after the implementation of Mutual Fund Regulation, 2067. Currently, there are 25 close-ended mutual funds and 4 open-ended funds operating in Nepal. Six close-ended mutual funds have already matured.

NIBL Sahabhagita fund is the first open-ended mutual fund of Nepal, established after the introduction of mutual fund regulation, operated by the fund manager NIBL Ace Capital Limited. The four open-ended mutual funds currently operating in Nepal are NIBL Sahabhagita Fund (NIBLSF), NIC Asia Dynamic Debt Fund(NADDF), Siddhartha Systematic Investment Scheme(SSIS), and NMB Saral Bachat Fund- E (NMBSBF).

Things to Know About Open-Ended Mutual Funds

First, the fund manager issues a fixed number of units for the new open-ended fund through NFO (New Fund Offering). The investors can apply for the issued units of the fund through meroshare and the CASBA facility provided by the banks. Through the allotment, the issue manager collects funds after the applications are processed. The fund manager invests the collected funds in different sectors like; listed equities, Primary Market Instruments, debt instruments, money market instruments, fixed deposits, etc. as per Mutual Fund Regulation, 2067. The investors who are willing to buy and sell the units of the fund then visit the distribution agents allocated by the fund manager itself or the fund manager itself. At the end of each day, the fund manager calculates the NAV (Net Asset Value per Share) of the fund, and the purchase and sales of the units of the open-ended fund occur in the NAV as per the previous day. Since the fund never liquidates its asset completely, the purchase and sales of the units of open-ended funds carry on continuously. The investor can get the return in form of both price appreciation and dividend income from the fund.

Major Features of Open-ended Mutual Funds 

The major features of Open-ended mutual funds are as below:

Unlimited number of shares

Open-ended mutual funds do not have a fixed number of shares. They are first issued with fixed units of shares and the fund size increases or decreases as the investors buy and sell these units. The fund size of these kinds of mutual funds changes regularly.

Does not have a fixed maturity period

Unlike close-ended mutual funds, Open-ended funds do not have a fixed maturity period. They are opened with a concept of going concern fund.

Is brought and sold at the places mentioned by the issue manager 

The open-ended funds are not traded in the secondary market. These funds are bought and sold by visiting the issue manager or the distribution units mentioned by the issue manager.

Traded at Net Asset Value (NAV) 

Since the open-ended funds do not trade in the secondary market, it is not possible to determine the price of the fund through the demand and supply of its units. In the initial offering, the units of the fund are sold at the face value whereas later these funds are bought and sold at NAV. The open-ended mutual funds are obligated SEBON to publish their daily NAV.

Benefits of Investing in Open-ended mutual funds

The major benefits of investing in Open-ended mutual funds are:

Liquidity 

Open-ended mutual funds provide high liquidity to the investors as the units can be redeemed at any time they want. While buying and selling the units, the fund itself is liable to sell and buy back the units as and when the investor wishes the transaction. This means that investors do not have to search for a buyer/seller of units in the market, they can buy/sell the units directly to the mutual fund at NAV which creates higher liquidity.

Various investment options 

Open-ended mutual funds provide different investment options to their investors such as onetime investment, investment through Systematic Investment Plans(SIPs), etc.

Exemption from brokerage charges

Since the close-ended funds are traded in the secondary market, the buyers and sellers of the fund should pay brokerage charges while purchasing or selling these funds. Inversely, as the open-ended funds are bought and sold through the fund manager themselves, they do not incur such brokerage fees. However, the investor needs to pay fees such as entry load, exit load, management charges, etc. in the fund. In the Nepalese context, the entry load fee is waived as per Mutual Fund Regulation, 2067

Performance over a market cycle 

Since Open-ended mutual funds do not have a fixed maturity period, they have a history of investment through a series of bull and bear markets. The investors can analyze the past performance of the funds over a longer period of time before investing in these funds.

Other Benefits 

The open-ended funds also enjoy other benefits that are enjoyed by the close-ended funds such as small initial investment, Diversification benefits, Expert management, tax benefits, and cost-efficiency.

Why you should invest in Open-Ended Mutual Fund through Systematic Investment Plan (SIP) 

A systematic Investment Plan(SIP) is the mode of investment in a mutual fund in which the investor invests

a fixed sum in the fund on a periodic basis. The periods may be weekly, fortnightly, monthly, or semiannually. Investors can grab tons of benefits for investing in a fund through SIPs.

Compounding Effect 

SIPs create a compounding effect in the investment to the investors. The return generated by the investment is reinvested in the fund and hence gives a compounding effect.

Small Regular Investment 

Through SIPs investors are making small regular investments in the fund. This fund later piles up to be a huge investment in the future which helps in reaching the financial goals of the investors faster.

Convenience During Investment and Withdrawal 

Since the small fund is invested regularly, investors generally have the sum to invest in a mutual fund. Moreover, since the open-ended funds are highly liquid, the investors can withdraw their investment whenever they deem necessary.

Rupee Cost Averaging 

One of the unique features of SIPs is that it offers Rupee Cost Averaging i.e. the funds invested helps in buying higher units of the fund when the market is at its low and lower units of the fund when the market is at its high. In conclusion, an Open-ended mutual fund offers investors to invest a small amount of funds on a regular basis that adds up to be a huge investment that later helps to meet the financial goals of the investors. It provides a huge profit opportunity to the investors.

Dhungana is the Deputy General Manager at NIBL Ace Capital.