Mutual Funds vs. Fixed Deposits: Which is a Better Investment In The Context of Nepal?

What is Mutual Fund?

A mutual fund is a skillfully managed investment vehicle consisting of funds collected from many investors to invest in diversified sectors such as stocks, fixed instruments, bonds and other assets. The mutual fund industry, in terms of returns provided, investors served and investment amount managed has the greatest success story worldwide.

In the context of Nepal, the history of mutual funds began with the establishment of “NCM Mutual Fund 2050” in 1993.

Currently, there are 31 mutual fund schemes in Nepal. Among them 27 are closed ended and 4 are open ended. An open ended mutual fund refers to a fund whose unit price is determined by NAV and number of the units can be increased/ decreased as per the investor’s requirement. The fund doesn’t have a maturity period. Whereas, closed ended mutual fund is opposite to the open ended mutual fund. The price of the mutual fund unit is determined by the market demand and supply and the number of units can’t increase or decrease after the issuance. These schemes do have maturity period.

Why Mutual Funds?

There are various options available in the market for investment i.e. stocks, fixed instruments, bonds and other assets. Each option has two sides: opportunities and risk. So why should we invest in Mutual funds vis-à-vis other investment options?

Mutual fund offers numerous benefits to its investors.

Higher returns

In the context of Nepal, mutual funds have given a high average return than the saving returns in BFI. Most of the people choose the BFI for savings against investing in mutual funds for investment growth; they don’t consider that the nominal interest rates received in savings account doesn’t even take care of inflation and thus is actually reducing value over time. Doing long- term investment in mutual funds has historically proven to be good hedge against the inflation.

During FY 74.75 and FY 73.74, none of the floated closed-ended mutual funds had distributed the returns to the investors. But interestingly, five years average return of mutual funds is 16% which is greater than the average saving returns of BFI’s.     

Expertise

The main motto of the schemes is to protect the capital of the investors, superior returns and ensure liquidity. To provide the services efficiently, mutual fund are backed by expert personnel i.e. research team, scheme manager, investment head, who are responsible to make optimum decision related to the market investments.

Require Low Investment

One of the biggest advantages of investment in mutual fund is the low investment requirement compared to other available options in the capital markets. Most of the options required large amounts which may not be affordable for the young/investors who have just started investing.

Diversification

One of the famous mantra given by Mr. Warren Buffet is “Do not put all your eggs in one basket” which means that we should not concentrate all efforts and resources in few sectors/stocks as we could lose everything if these stocks/sectors get hit badly. To avoid the concentration risk, one should diversify the portfolio. For individual investor creating a portfolio of stocks will require large capital. Mutual fund provides diversified investment opportunity to the investors who have limited capital.

Conclusion

Every investment options have two-sides. However, expertise management, diversification, large capital and selection of fundamental well sound stocks helps to mitigate the risk associated with the capital market and those opportunities is provided by the mutual funds.

Disclaimer:

This research is done only for knowledge purpose; it is advice to investors to make investment decisions based on own analysis.

-Roshni Pandit

Research Analyst

(CBIL Capital)