The mutual fund industry is not small; it is just that the industry is virgin.  

Chief Executive Officer (CEO) of NMB Capital Limited, Mr Shreejesh Ghimire, in a conversation with ShareSansar, spoke about the on going preparation for the launch of NMB Mutual Fund along with  Mutual Fund scenario in Nepal,  role of the government in developing Mutual Fund and Capital Market and their take on the NEPSE.

Why should investors put money into NMB Mutual Fund and how would it be different from existing mutual funds?

If you name a brand called NMB, you primarily associate that brand with capital market. If you see its history, NMB was primarily one of the pioneers and prominent merchant bankers of the country. So we have carried that legacy. To launch a mutual fund company was a well thought out decision and we took quite amount of time to establish ourselves with initial focus on core research.

We generally say that Nepali market works on low fundamentals. But once you have decided to do products like mutual fund you are playing with mass money, so the first thing is to give them justice. And to do justice, we have to be fundamentally sound on what we are doing. So we are currently trying to establish on what fundamentals this market works. With our thorough research, done by a sizable team that we had deployed, we can confidently say today that Nepali market does work on fundamentals.
 
What type of fundamentals are you talking about?

It is not that all markets are same. If you see the US and the Indian sentiment, they have peculiar factors that determine their movements as both the markets are bigger. In case of Nepal the market goes up when rights shares and bonus shares are announced. That could be one fundamental. But to understand to what degree and to what extent can we rely on them is very important.

The second issue is the influence of different type of investment products in the market. In any part of the world, if you talk about investments, four products are generally thought of: stocks and bonds, the key capital market instruments; real estate; commodities, primarily gold and silver; and fourth, derivative products, which could be a hybrid or mix of any of the other three. In our context, we have three: we have a market for capital market instruments like shares and bonds but we don’t have a proper structured market for real estate and commodities, though there are a few commodities players. There is no proper regulation that says this is a commodities market, but investors do have a choice to change hands from stocks to real estate to gold, you can always revolve these three things around.  

Now, our research showed that once the NEPSE started going deep, the real estate was going heavy and the price of gold ballooned from US$ 680 to somewhere around $US 1750 per ounce in the international market. The subsequent effect was immediately seen in the local market. Again, once gold started being stagnant or was more volatile and the real estate was low, gradually the stock market picked up and is still at 530 or 540. My team had suggested at the end of March that by the end of August the market would be somewhere around 540; and it is somewhere around 540 now.

So when we decided to do mutual fund, I started by saying that we have to do justice to the people. NMB capital will always first think about giving justice to the people and justice means good returns on investments, safe investments and possible diversification. We can ensure that only by identifying the fundamentals the drive the market.
 
Is your strategy any different from other mutual fund companies like Nabil and Siddhartha Capital?

One of the primary benefits of mutual fund is to get the advantage of diversification. We have very limited room in this market to have a clear cut diversification as outlined in the books. If you stick to the clear cut financial principles, it would be very difficult to explain how you will diversify in this market.

Having said that, I would have been more concerned if the stock market was dominated by real sector than banking at this point of time. The reason behind is that banking is always highly regulated sector worldwide. The real sector provides better opportunity to have a better mix. But again, though in our case there is no opportunity for diversification, the risk of failure is lower. Because the core sectors that we have to target are: banking and finance, which is highly regulated; insurance, still highly regulated industry; and a handful of others. We would definitely be targeting stocks that are performing better.
 
Is government doing anything to encourage mutual fund business? Are you happy with what is being done?

Yes, the government is doing something for the mutual fund industry. SEBON has amended few regulations, and the last budget has waved capital gain taxes on trading of securities. Those are very good signs. Straight away as a company or as an individual you have already saved about 10 percent that you would have paid to the government as capital gain tax. So, yes, the government doing something,

But to answer the second part of your question — whether you are happy or not – I have to say, no. We are a completely new industry targeting investors at the bottom of the pyramid. I am talking about the masses to whom we offer chances to cultivate investment habits. So, will the small 5-10% capital gain tax waiver entice them to join mutual funds? Maybe not.

If I am coming up with a mutual fund, it is primarily my responsibility to inform the public. But the market is so small and my revenues are restricted at two percent. I cannot charge more than 2 percent on any mutual fund scheme. It is not like FMCG or commodity products where you will have a perpetual value that can be marketed to maximize profit through mass selling,

As my revenues are restricted, I have to, whether I like it or not, be restricted on my costs, too. So I don’t have enough room to go to the masses to market it and spread awareness.

I am not saying that the band of 2 percent has to be increased because ultimately that will be paid by the investors themselves. As mutual fund is an industry in itself and it is one of the primary pillars of the capital market, it is the responsibility of the government, SEBON, even NEPSE, to reach out to the public and make them aware about why they should invest in mutual funds, why it is seen as safe investment all over the world.

As mutual fund players, it is the responsibility of us, too, but we have very limited resources to do that. If we tell people to buy NMB mutual fund because it is good, then they will think that NMB mutual fund is good. But what I am trying to say is that mutual fund industry in totality is good. So, the government as well as SEBON must join hands with us to make public aware about it.

If the market is very small, why are so many banks rushing to establish mutual fund companies at this time?

I have to correct your statement here. The mutual fund industry is not small; it is just that the industry is virgin. Before democracy, how many banks where there in Nepal? Three from the government and probably 3 to 4 from the private sector. What was the reach? Nominal. The banking population at the time was so small, but does that mean there was no market. The market was huge, but it was untapped. But after 2046, in the post democracy phase, when there was regulatory flexibility to establish new banks, see the size of banking industry in 20 years time.

Today, why do you talk only about banking when you talk about stocks? When you talk about performing companies, why do you always talk about banks? Apart from few other sectors, the market is dominated by banks and they all are performing good. Even small banks, who have just got established two or three years back, they generating EPS of somewhere around 12 to 15 percent. Is that bad? It is good, so given some more time that will definitely become a performing industry.

Even in case of the capital market, the entire communication goes inside the valley only or in few places like Pokhara, Biratnagar, Birgunj -- the big cities. Isn’t it the responsibility of all of us, including the government and SEBON, to expand the market?

In India SEBI has done a lot to promote this industry. Last year’s Indian budget had a specific discussion scheduled for mutual fund industry because it was stagnating. It is already a 7 lakh crore market in India and their worry was that it is stagnating. So in order to grow the market further, they set it aside as a key area for discussion in the fiscal budget. Imagine the importance of mutual fund there, considering the size of the Indian economy today. They had a specific agenda only for one topic, and I am not talking about the capital market as a whole, but mutual fund as one of the products of the capital market.

So until and unless the entire perspective of the government as well as regulators change toward developing the capital market it is very difficult make inroads into the market.

In Nepal’s case, this year’s budget had just three lines dedicated to capital market. Just three lines in the entire document!

The first line, I think, talked about making SEBON more practical and more market-friendly. Second was a generic statement about developing the capital market, there was no specific agenda what actually is that. Third it talked about commodity market which is not a part of capital market. But since SEBON has been directed to look after the commodity market, out of three lines one line was taken away by the commodity market.

If just two lines cover capital market in the entire budget, you can someway visualize whether we are doing enough to make this market bigger.
 
Why has the sector fallen in lesser priority of the government?

To understand that you’ll have to go to the roots. Till 1991, before Indian economy was liberalized, very few companies were listed in that country -- few in numbers and primarily owned by government entities. Post 1991, for five years they were working to bring foreign investors to India. The PV Narasingha Rao government conducted a thorough study, and though India got liberalized in 1991, the real economic growth started after 1997 when the policies were changed to welcome Foreign Direct Investments.

Basically it started with a reform and you cannot carry out reform in a year.

For an economy like India that is multidimensional, multicultural, with but mass population still lying below poverty line, economic reform was a really challenging job. They had to contribute a good amount of time to come up with the picture that reflected their vision. So growth occurred in the years after 1997, as foreign giants started entering India, and between 2002 and 2010, there would be no one who would talk about week Indian sentiment.

Their growth rate was fabulous, stock market was growing like crazy, investment and FDIs were growing on year-to-year basis -- everything was growing.

In our case too, we have to come back again to the roots. How does our corporate sector work? Most players of our corporate sector are closed entities. What is the valuation of a company like WaiWai, Surya Nepal, no one knows.

The first thing that we need to know is why they don’t want to go public. In many of the discussion forums and meetings, what I have heard is that the private businessmen don’t want to disclose the size of their business. So are we against the global trend then. The entire world is going towards disclosure and book building and we are into a concept called book squeezing and non disclosure. Will that be acceptable? It is not possible at all. So to make this industry happen, the government needs to prioritize it. Not just six months or one year, take two years, take three years, but make a clear road map how you want to go ahead.

When you talk about Ambani family today, you don’t talk about their assets. If you talk about Bill Gates, you’ll not talk about his assets. You talk about the amount of ownership these people control or hold in the companies they run. If you compare the market value of that company with face value of Mukesh Ambani, what would be size? It would be a tiny one.

What I am trying to say is the government needs to understand the value of book building and need to encourage people to come out to public. If you trade a share at 400 rupees and pay 5 percent capital gain tax, you pay 15 rupees if the face value is 100. But if the same share get listed and people have trust in that share in terms of the return and the way the management is run, the share might be priced at Rs 1500. We have many examples to prove this. The same share of 100 rupees value, when gets traded at 1500, you get capital gain out of 1400 rupees that is 70 rupees. So if you encourage people to go into book building and go for a float then in no circumstances the government will lose revenue.
 
What should investors look for before putting their money into a mutual fund?

First of all I would say they must know about the management of the mutual fund. They need to be sure who is running it. They need to have thorough information about who are the supervisors, how that structure is built and how committed they are because it largely depends not only upon the market performance but also with the portfolio managers, the amount of time they put on research. To be well educated about the market, the company must have all the relevant databases in place because, ultimately, it is all about how you trade, you sell, you buy and how you make money. If you just invest today and if you just sleep for five years, it is likely that the mutual fund will not make money.
      
Where do you see the NEPSE in the coming days?

By the end of 2014, NEPSE should be somewhere around 800 points, if there are no foul plays. It has been 13 months since we started working. Initially, we had a team of seven and all of them were engaged in thorough research. The first thing we did was create a database. We devoted a lot of time to study that database and now we are running 15 valuation models for each stock at present. None of the banks in Nepal are working on that concept. I don’t know how our mutual fund will perform -- that will be decided by the future -- but I am confident about the fundamentals I am relying on. On any particular day, anybody can ask me why I invested in certain shares and I can explain them point by point the reasons. I can challenge them to prove me wrong as per global principle. We started working from 2000 and we have everyday’s tick since the last thirteen years. We worked really hard to prepare the models and our research and studies have shown that the market works on fundamentals.

Talking about our stock market, we trade emotionally and that is because of two reasons: one is low level of awareness and there is still the follower attitude.

If you are getting 12% return from any stock annually, you will say it is a very weak return and start thinking how much another is paying. But if you have choice of keeping your money in four different banks, you will go to a bank that is offering higher rate, even if the difference is of 25 paisa. If Bank A is offering 7.50% and Bank B offers 7.75%, you will not consider anything else and put your money in the bank that is offering 7.75.

But you forget that even the 12 percent can be relatively safer if the company is sound and if you can see that it can give a dividend of 12-15% annually. But if nobody talks about the underlying risks, you will follow the additional five percent returns with a blind eye.

But now, rise in transactions with the rise in the number of people engaged in share trading is gradually killing that old habit. So that is where the development is.
 
When will NMB Capital launch its mutual fund product into the market?

We are ready. If SEBON gives its approval, we can float scheme in seven daystime. But it has been more than one and a half months we filed our offer document at SEBON and we are still waiting for their response. We were planning to launch it by 2nd or 3rd week of Shrawan, and at worse the end of Shrawan. But now I am skeptical about Bhadra as well. So Asoj 15 would be more realistic. The size of our mutual fund would be Rs 60 crore. Out of that Rs 9 crore has already been committed by the sponsor as well as the fund manager -- NMB Bank and NMB Capital. Now, we have to sell 51 crore to the public.

One thing that I’d like to add here is that as an investor, you need to have a horizon. You must determine your investment horizon. In Nepal, I generally hear investors talk about short term. They always talk about short term even though they have no intention to trade in short term. After buying a stock, you want to wait for a year, but you just want all forecasts and everything ready for the next three months. You don’t want to wait to see the company’s performance for the next one year. You have no intention to sell in three months, but you always restrict your horizon for three months.

I have to tell this to all investors that mutual fund, in general, is not a product where you’ll gain returns in three months.

Two players joined this industry initially are Siddhartha Capital and Nabil Invest. From day one, I read a lot of criticisms about Nabil Invest saying they have not been able to perform. Yes, almost for a month their NAV was below par, but today, in three months time, they have already reached almost 10.6 levels. Six percent return in three months, taking all the costs. How can you say that’s bad? They have come up with an investment horizon of five years, at least give them a chance to perform, see their first year’s performance.

In Siddhartha’s case, they are on near 12 rupees -- 20 percent return in hardly six months. They have not even completed one year of operation and their portfolio says the total value is somewhere around 20 percent of what they have invested. The dividend they have committed, if the market remain in the same line, they will distribute for sure.

Where have they gone wrong? Have they deviated from any fundamentals?

I think, no.

In case of stocks, once a year’s performance is over, you wait for the next quarter analysis and then wait for a year for the next round of return. In terms of mutual fund, it is on weekly basis and if you plot a linear graph for both the players, it is going up. That means they are sound on their fundamentals. They are doing good, and to make this industry happen, the market needs to respect that.

I am optimistic that people will understand with time. Even in India, the mutual fund industry didn’t become a 7 lakh crore industry overnight.

So, what is holding the policy makers back?

As I see it, the government’s horizon is small. Why should mutual fund be allowed, what does it do, these are the things that we need to focus on now. If the trading volume in stock market increases, government’s revenue also increases, and it is same in case of trading through mutual fund. Therefore, the government should come up with approach to increase participation of people in stock. By now it is established that a transparently run company can give good returns, the era of fear that some company would run away with all the money is gone.

Anyone will agree that no mutual fund comes with guaranteed returns. But if you look at the global mutual fund industry, it is one of the most sought after investment vehicle worldwide. So, instead of worrying about possible risks, the government should bolster its regulatory role -- just as in the case of banks -- but at the same time be as flexible and supportive as possible to boost mutual fund as an investment product.