NMB Hybrid Fund L-II Opens for Subscription; CEO Deepesh Kumar Vaidya Shares Insights on Fund Strategy and Growth Prospects

The "NMB Hybrid Fund L-II" closed-end mutual fund scheme is set to open its issue from today i.e. 24th of Magh till 28th of Magh, 2081, with a potential extension until Falgun 8, should the issue not be fully subscribed by the initial closing date. This new fund offers an investment opportunity, with 12 crore units available for subscription, of which a portion is allocated to the scheme manager, NMB Capital Limited, and the fund sponsor, NMB Bank Limited, while the remaining units are open for public and institutional participation. Investors can apply for a minimum of 100 units up to a maximum of 1,20,00,000 units, allowing for a diverse range of participants.

As of now, NMB Capital is managing two other closed-end funds, NMB 50 and NMB Sulav Investment Fund - II (NSIF2), along with an open-end fund, NMB Saral Bachat Fund - E. The introduction of "NMB Hybrid Fund L - II" marks an exciting new chapter for the company as it seeks to expand its portfolio and provide investors with a balanced and promising investment option.

To gain further insights into this new offering, we spoke with Mr. Deepesh Kumar Vaidya, the CEO of NMB Capital Limited, who provided us with detailed information about the fund's objectives, strategy, and potential benefits for investors.

1. Mr. Vaidya, could you kindly provide an overview of the "NMB Hybrid Fund L-II" and elaborate on its core objectives for prospective investors?

NMB HYBRID Fund L – II (NMBHF2) is the sixth mutual fund scheme offered by NMB Capital. It is a closed-end hybrid fund with a maturity period of 10 years. The size of the issue is NPR 1.2 billion which can be increased to 1.5 billion in case of oversubscription. The primary objective of NMBHF2 is to safeguard investors' capital while generating competitive returns. The scheme follows a balanced investment strategy, allocating its portfolio across both equity securities and fixed-income instruments. By doing so, it aims to offer stability for risk-averse investors while achieving higher returns compared to risk-free investments. The scheme is a continuation of NMB Capital’s second mutual fund, NMB HYBRID Fund L – I, which matured in October 2023. Over its 7-year tenure, it successfully delivered market-beating returns. Even during periods of market volatility, the scheme provided investors with relatively stable and consistent returns. 

2. What distinctive features does the "NMB Hybrid Fund L-II" offer in comparison to other closed-end funds currently available in the market?

Currently, 44 mutual fund schemes are in operation, with 43 being equity-oriented and only one debt fund available in the market. Equity-oriented schemes primarily invest in equity shares, offering higher return potential but also carrying greater risk. In contrast, debt funds allocate the majority of their investments to fixed-income instruments, providing lower risk but limited return potential.

Equity funds are best suited for investors with a high-risk tolerance, while debt funds cater to those seeking stability and modest returns. However, the current market lacks an investment option that bridges the gap between these two extremes—one that offers the growth potential of equities while maintaining the security of debt instruments.

NMB Hybrid Fund L-II is designed precisely to meet this need. As a hybrid fund, it strategically balances equity investments for growth with fixed-income instruments for stability, aiming to deliver higher returns than debt funds while mitigating the risks associated with equity investments. This unique positioning sets it apart, as no other fund manager currently offers a scheme with such a well-balanced risk-return profile.

The fund will allocate 30-65% of its portfolio to equity securities and 20-65% to fixed-income instruments, ensuring flexibility to adapt to market conditions while maintaining a prudent risk-adjusted strategy. With this approach, NMB Hybrid Fund L-II stands out as an ideal investment choice for investors seeking a stable yet growth-oriented investment solution.

3. The allocation of 1% to NMB Capital Limited and 14% to NMB Bank Limited has caught attention. Could you shed light on the strategic rationale behind this decision?

NMB Capital serves as the fund manager for this scheme, while NMB Bank acts as the fund sponsor. Together, their investment in the scheme—1% from the fund manager and 14% from the fund sponsor—constitutes the seed capital. As per Mutual Fund Regulation 2067, a minimum of 15% seed capital is required, which can be jointly invested by the fund manager and fund sponsor. This initial investment plays a crucial role in aligning the interests of the fund manager with those of the scheme and its investors, ensuring a commitment to prudent fund management. For NMB Hybrid Fund L-II, NMB Capital will contribute NPR 12 million (1%), while NMB Bank will invest NPR 168 million (14%), meeting the regulatory seed capital requirement.

4. What strategies are in place to ensure that both the general public and institutional investors participate adequately to meet the desired subscription targets?

Mutual funds are an excellent investment option for both individual and institutional investors. Since December 2012 to January 3, 2025, a total of NPR 59.1 billion has been raised from unitholders through 56 mutual fund schemes. Over this 12-year period, mutual funds have distributed NPR 17.7 billion in dividends, and 12 schemes have matured, returning NPR 12.5 billion in redemption value.

Mutual funds have consistently outperformed the market, delivering superior returns with lower volatility. In aggregate, mutual funds have generated a total return of 551% over 12 years, translating to a compound annual growth rate (CAGR) of 16.9%. In comparison, the overall stock market delivered a total return of 392% with a CAGR of 14.2% during the same period. Additionally, mutual funds have achieved these returns with significantly lower volatility, as reflected in an annual standard deviation of 14.1%, compared to 21.5% in stock market returns. This demonstrates that mutual funds provide better risk-adjusted returns than direct stock market investments.

Beyond performance, mutual funds stand out as one of the most transparent and liquid investment alternatives in the market. To raise awareness among investors, we have adopted a targeted outreach strategy—conducting one-on-one meetings with institutional clients while also producing informative videos for social media platforms like YouTube, Facebook, and TikTok to educate the general public about the benefits of mutual fund investing.

Given the unique nature of this scheme, we are confident that investors will recognize its value and participate in this offering. This fund is a continuation of our previous hybrid fund (2016–2023), which successfully delivered market-beating returns. As a result, we already have a strong base of investors familiar with this investment strategy and our management expertise. We believe our previous investors, along with new participants, will see this as a compelling opportunity and contribute to the success of this fund.

*Time weighted return of mutual fund industry computed using weekly NAV since 25-Dec-2012 till 03-Jan-2025 whereas monthly reports have been used to compute fund inflow/outflow for open-end schemes

5. As NMB Capital is already managing closed-end funds like NMB 50 and NSIF2, how does the introduction of "NMB Hybrid Fund L-II" align with your broader investment portfolio and strategy?

As a mutual fund manager, we believe in developing the mutual fund industry as a distinct asset class, rather than simply increasing the number of funds. We recognize the importance of offering funds with diverse investment strategies to cater to a wider range of investors with varying risk-return preferences. A well-structured mutual fund industry should feature diversity in investment style and asset allocation, ensuring that investors can choose funds that align with their financial goals and risk tolerance.

In line with this vision, NMB Capital has designed mutual fund schemes that are distinct from one another. For instance, while NMB 50, NMB Sulav Investment Fund II, and NMB Saral Bachat Fund – E are all equity funds, each follows a unique investment strategy:

• NMB 50 is a closed-end fund that invests in a portfolio of up to 50 high-potential stocks, focusing on industry leaders with strong future return prospects.
• NMB Saral Bachat Fund – E is an open-end fund that primarily invests in large-cap stocks, with a relatively concentrated investment approach.
• NMB Sulav Investment Fund – II is a flexi-cap fund, offering strategic exposure across large-cap, mid-cap, and small-cap stocks, ensuring a more dynamic and diversified investment style.

Previously, NMB Capital also managed a hybrid fund, which matured in 2023. Unlike the equity funds mentioned above, the hybrid fund maintained a balanced allocation between equities and fixed-income securities, providing a mix of growth potential and stability.

The newly proposed NMB Hybrid Fund L – II continues this approach, offering a hybrid investment strategy that balances return potential and risk. Compared to our equity funds, this hybrid fund is designed to offer lower volatility while still delivering attractive returns, making it an ideal choice for investors seeking a balanced risk-return profile.

6. What key advantages do you believe "NMB Hybrid Fund L-II" offers to investors, particularly those looking for alternatives to traditional investment avenues?

Investing in NMB HYBRID Fund L-II offers a wide range of benefits for investors. In the current market, with over 250 listed stocks, there is significant diversity in potential returns. For example, a comparison of the Price-to-Earnings (PE) ratios of these stocks reveals a broad spectrum: more than 60 stocks have a PE ratio above 100, while another 60+ stocks report negative PE ratios. This variation emphasizes the importance of building a well-curated portfolio that not only capitalizes on potential opportunities but also manages risks effectively. By investing in NMB HYBRID Fund L-II, you gain access to a professionally constructed portfolio managed by NMB Capital’s dedicated investment and research teams, who perform in-depth analyses to ensure optimal risk-adjusted returns.

Transparency is another key advantage of investing in NMB HYBRID Fund L-II. In line with the practices of other close-end funds, we publish the Net Asset Value (NAV) at the end of every week, along with a detailed NAV report that includes a comprehensive list of all securities held by the fund. Additionally, the fund undergoes an annual audit by independent auditors, and audited financial statements are made available to investors.

This fund stands out due to its unique asset allocation and risk/return profile, which differentiates it from other funds in the market. By adding NMB HYBRID Fund L-II to your investment portfolio, you gain the opportunity for diversification, reducing overall portfolio risk while still aiming for attractive returns.

Furthermore, when you invest in NMB HYBRID Fund L-II, your funds are managed by one of Nepal's top fund manager, as recognized by the Fund Management Quality rating. NMB Capital has consistently received a rating of AMC Quality 2 from ICRA Nepal, the highest rating in the industry, and we have been the exclusive recipient of this rating for the last three years. This recognition is a testament to the strength of our research team and our 10 years of experience managing assets exceeding NPR 5.5 billion. Our expertise in asset management and strong analytical capabilities give us a sustainable competitive advantage, ensuring the highest level of service for our investors.

Finally, NMB HYBRID Fund L-II offers excellent liquidity. As the fund is listed on the stock exchange, you can easily liquidate your investment by selling units at the prevailing market price, ensuring you have the flexibility to access your funds when needed. 

7. Given that this is a closed-end fund, how do you plan to manage liquidity and ensure a smooth exit process for investors when the fund matures?

Having successfully liquidated two closed-end schemes in the past, we are confident in our ability to effectively manage the liquidation of securities held by the NMB HYBRID Fund L-II. As with our previous schemes, we plan to gradually liquidate investments several months prior to the maturity date to minimize impact costs. Any unlisted securities will be auctioned off as part of this process. In the past, liquidating our investments in debentures required multiple auction notices, which extended the liquidation timeline. However, we believe that the debenture market will be far more liquid by the time this fund reaches its maturity, making it easier to liquidate debenture investments without experiencing a significant haircut. Once all investments have been liquidated, NMB Capital will ensure that the liquidated funds are promptly distributed to the unitholders.

8. What are the primary risks associated with investing in "NMB Hybrid Fund L-II," and what measures are in place to mitigate these risks for investors?

The primary risk associated with investing in NMB HYBRID Fund L-II is investment risk. Since the scheme includes equity investments, returns can be uncertain, and negative returns are always a possibility. As a result, the overall performance of the scheme may fluctuate in line with the movements of the equity market. However, with a maximum equity exposure of 65%, the volatility of the scheme's returns is expected to be significantly lower than that of the broader stock market. While equity investment risks can never be fully eliminated, we aim to mitigate these risks by focusing on undervalued stocks with significant upside potential relative to their downside risk.

In addition, NMB Capital has developed a comprehensive risk management framework for its mutual funds, which enables us to proactively identify and address various potential risks, including liquidity risk, operational risk, investment risk, credit risk, and others. This structured approach helps ensure that we manage risks effectively, striving to protect and maximize value for our investors.

9. Could you share the performance outlook for NMB 50 and NSIF2, and how do you anticipate the new fund performing in comparison to these existing offerings?

NMB Capital's previous funds have demonstrated strong performance. For instance, NMB 50, which began operations on August 30, 2019, has achieved a total return of 102.9% (a CAGR of 19.2%), including cash dividends of 86.1% as of January 3, 2025. Over the same period, the broader market generated a total return of 116.2% (a CAGR of 21.7%). NMB 50 currently has a NAV of NPR 11.21 per unit, with an equity exposure of approximately 80%.

Similarly, NMB Sulav Investment Fund - II, launched on August 31, 2022, has achieved a total return of 30.6% (a CAGR of 13.0%), including cash dividends of 10%, compared to the stock market's return of 29.6% (a CAGR of 12.6%) as of January 3, 2025. This fund's current NAV stands at NPR 12.07 per unit, with equity exposure around 85%. Both of these funds have consistently distributed dividends over the years, showcasing their reliability.

Our open-end fund, NMB Saral Bachat Fund – E, which was allotted on September 22, 2021, has also shown positive performance, delivering a return of 3.3% as of January 3, 2025, while the broader market has experienced a total decline of 4.6% during the same period. The NAV of NMB Saral Bachat Fund – E currently stands at NPR 10.33, with equity exposure of approximately 85%.

The future performance outlook for these funds, along with the proposed NMB HYBRID Fund L-II, remains promising. NMB Capital’s expertise in strategically managing asset allocation and the equity market’s tendency to grow over the long term position these funds for sustained success. While the NMB HYBRID Fund L-II is expected to deliver lower returns compared to our equity-focused funds, it shall offer a higher degree of safety and stability, making it an attractive option for risk-averse investors.

(Returns were calculated assuming dividend paid out were reinvested back in the fund)

10. Transparency is crucial for investor trust. Could you describe the steps NMB Capital has taken to ensure transparency in the management and operations of the "NMB Hybrid Fund L-II"?

Transparency is key to building investor trust, and at NMB Capital, we are committed to providing clear and timely disclosures of material information.

For closed-end schemes, we calculate and publish the Net Asset Value (NAV) regularly on the NMB Capital website. In the case of open-end schemes, the NAV is calculated daily and published on our website, along with other important details such as the number of outstanding units, total net asset value, and units sold and purchased on the previous day.

Additionally, NMB Capital publishes a monthly report that includes a comprehensive list of all securities held by the fund. These reports provide key disclosures, such as the treatment of bonus shares and rights shares, the PE ratio of the overall portfolio, and other critical information. Our detailed monthly NAV report that are published in our website also includes the full list of shares held by the fund, even those that have not yet been listed, along with the valuation price for each security. For closed-end schemes, the monthly report includes the weekly NAVs for the month, while for open-end schemes, it includes the daily NAVs and the total number of units sold and redeemed throughout the month.

Moreover, we understand that some investments may involve securities whose market prices cannot be used for valuation according to regulations. To address this, we have developed a clear valuation guideline, which investors can easily access on our website. This valuation policy disclosure is particularly crucial for open-end schemes, as their NAV is calculated daily, making transparency in the valuation process essential for maintaining investor confidence.

11. How do you assess the current investment climate in Nepal, and in what ways do you believe "NMB Hybrid Fund L-II" is positioned to capitalize on this environment?

The current investment climate in Nepal presents both opportunities and challenges. Interest rates are at their lowest in recent times, making borrowing cheaper and encouraging investment in various sectors. However, the stock market exhibits significant diversity in stock valuations, with some stocks being overpriced while others remain undervalued. Additionally, market volatility is increasing, making it crucial for investors to adopt a strategic approach to their investments.

In this environment, NMB Hybrid Fund L-II is well-positioned to capitalize on market dynamics. As a hybrid fund, it maintains a balanced mix of debt and equity investments, allowing it to generate relatively stable returns despite market fluctuations. The fund benefits from a strong and prudent fund management team that carefully allocates assets to mitigate risks while maximizing potential returns. Typically, the fund invests an equal portion in debt and equity instruments, ensuring a balanced risk-reward ratio. Furthermore, it has the flexibility for tactical asset allocation, enabling it to take advantage of longer-term market cycles.

Given the current market conditions, NMB Hybrid Fund L-II’s ability to balance stability with strategic investment opportunities makes it a compelling choice for investors looking to navigate Nepal’s evolving investment landscape.

12. Looking ahead, how do you foresee the growth of closed-end mutual funds in Nepal, and what role do you envision NMB Capital playing in this growth trajectory?

The growth of mutual funds in Nepal is inevitable, though the industry remains in its nascent stage. Investors are gradually understanding the concept and recognizing the importance of investing through mutual funds. Currently, Nepal’s mutual fund assets account for approximately 1% of GDP, significantly lower than India’s 15%, highlighting a vast untapped market with immense potential.

However, within this growth trajectory, open-end funds are likely to outpace closed-end funds. General investors are increasingly drawn toward open-end schemes, particularly due to flexible investment options like Systematic Investment Plans (SIPs). A similar trend was observed in India, and it is reasonable to anticipate a parallel shift in Nepal as investor awareness and market participation continue to expand.

Amidst this evolving landscape, NMB Capital is well-positioned to play a pivotal role. With its expertise in fund management, strategic asset allocation, and strong market presence, the firm can drive industry growth by launching well-structured funds, enhancing investor education, and upholding high governance and transparency standards.

Furthermore, as demand for hybrid and diversified investment options grows, NMB Capital can leverage its experience to introduce innovative fund structures, ensuring sustainable growth and fostering increased participation in Nepal’s mutual fund industry. By effectively navigating market cycles and adapting to investor needs, NMB Capital can solidify its position as a key player in shaping Nepal’s mutual fund sector.

Conclusion

The "NMB Hybrid Fund L-II" presents a promising investment avenue in Nepal’s growing mutual fund market. With its unique structure and the backing of NMB Capital and NMB Bank, the fund aims to cater to a wide range of investors, from individuals to institutions. The fund's flexibility, along with the strategic allocations and expert management, makes it an appealing option for those seeking a stable yet potentially rewarding investment.

Through our conversation with Mr. Vaidya, it is clear that NMB Capital is committed to maintaining transparency, minimizing risks, and delivering value to its investors. As the closed-end mutual fund market continues to evolve, "NMB Hybrid Fund L-II" stands out as a key player poised to make a significant impact in the investment landscape of Nepal. Whether you are a seasoned investor or new to the world of mutual funds, this fund offers an opportunity worth considering as part of diversified investment strategy.