Are Mutual Funds in Nepal Cheaper than their Real Worth? Should You Buy Mutual Funds or Ignore Them?

There are a total of 17 close-ended funds in Nepal.

There are close-ended mutual funds and there are open-ended mutual funds.

Close-end mutual fund: They issue a certain number of shares for a particular period of time. They cannot increase or decrease the number of shares after the issue. Closed-end mutual funds will mature over a predefined period. Its price is determined by supply and demand. Closed-end mutual funds are traded in exchange.

Open-end mutual funds: They can increase or decrease the number of shares according to the requirement and they don’t have a maturity period. Its price is determined by NAV. Open-end mutual funds are not traded in exchanges.

What you should know about mutual funds

All mutual funds are issued at a par value of Rs. 10 per share. A mutual fund is a professionally managed pool of money collected from investors to invest in securities. Securities mean investment assets like stocks, bonds, money market instruments, etc. Thus, after the collection of the fund, the fund managers invest in stocks, debentures, IPOs, and fixed deposits.

Based on the performance of their investment, the NAV of the funds is determined. According to Investopedia,

Net asset value (NAV) represents a fund's per share market value. It is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding.

Moreover, there is another measure of a mutual fund's performance: its LTP. Investors closely observe the investment areas of the funds and the profitability. They then determine the market price of the fund via a free-market mechanism of supply and demand. 

How an investor can take advantage of the difference in NAV and LTP

The NAV and the market price (LTP) are rarely equal. While the company's actual performance until now is reflected in the NAV, the LTP incorporates investor sentiment, future expectation, and the general market trend.

In this article, we compare the NAV and LTP of the mutual funds that are currently traded in NEPSE. A lower LTP than the NAV means that investors are undervaluing the mutual fund. Meanwhile, if the LTP is higher than the NAV, it means that investors are optimistic about the mutual fund and they have overvalued it.

If one believes in the strategy of buying undervalued securities and selling when they are overvalued, perhaps the comparison of a mutual fund's NAV and LTP might lead him to something useful. 

Note that investors can be right as much as they can be wrong. Although we compare the NAV and LTP in a straightforward way, nothing presented in this research should be taken as a buy or sell suggestion. 

Only close-ended funds are traded in NEPSE. Open-ended funds do not have an LTP. Thus, we are only concerned about them in this article. 

How to read and understand the comparison table shown below

1) The latest NAV of mutual funds are listed. These are mostly the latest NAV unveiled last week. For those funds who have not unveiled their latest week's NAV, we have used last week's or last month's data. 

2) The LTP is the closing price of the mutual funds on the last trading day, i.e. of December 05.

3) Premium means that the mutual fund is trading at a higher price than its NAV. Meanwhile, a Discount means that it is trading at a lower price. 

For instance, NIBL Samriddhi Fund 1 (NIBSF1) is trading at a discount of 11.11%. This means that a unit of the mutual fund can be bought at an 11.11% cheaper price than the NAV. 

 *Not traded in NEPSE

Wrapping Up:

All the mutual funds are trading at a lower price than their respective NAV, as shown by the table. 

Mutual funds are comparatively safer investment vehicles. They may prove highly profitable for beginners who want to reap the benefits of the stock market without putting in the required effort while investing themselves. Furthermore, mutual funds are great entry options for beginners to test the water while they are learning a strategy of their own.

Although mutual funds are not 100% safe, they certainly hedge the inevitable risks in the securities market. Mutual funds are required to diversify their portfolio by law. Since a significant volume of new investors has entered the stock market in the recent IPO boom and NEPSE's bullish rise, mutual funds may be of interest to them.

While writing this article, a handful of mutual funds with a combined worth of Rs. 5.4 Arba is in SEBON's pipeline. They will be open for application to the general public someday soon. If investors can contribute the much-needed capital via these funds, the country as a whole can utilize this fund for the advancement of the economy. Needless to say, the investors who put their capital will be rewarded with profits.