“Things to Know before investing in Mutual Fund Schemes – NMB Capital Ltd.” interaction with Deepesh Kumar Vaidya, CEO of NMB Capital Ltd

What are Mutual Funds? How does the IPO of a Mutual Fund differ from the IPO of a Company?

A mutual fund is an investment instrument that pools the fund from many investors (small/big retail investors or corporate houses) through Initial Fund Offering (IPO)/New Fund Offering (NFO). Mutual funds are operated by professional money managers who invest the pooled sum in various financial instruments on behalf of their unitholders. The objective of a mutual fund is to maximize the return of its unitholders given the risk objective and nature of the fund which is specified in the prospectus, published before the NFO/IPO, of mutual funds. The return generated from such investments is transferred to its unitholders in terms of cash dividend or capital appreciation throughout the tenure of the fund. Thus simply, an investor can think mutual fund as a cost-efficient way of assigning professional managers to manage their investments for the benefits from the capital markets over the period of investment or till the maturity of the fund.

The IPO of a company significantly differs from the IPO/NFO of Mutual Funds. Generally, companies issue IPOs with the objective of raising funds for expansion or for fulfilling their current need for cash. Investment in an IPO of a company means owning a specific percentage of a company. While investment in the IPO of Mutual Fund provides indirect ownership to multiple companies that mutual fund holds throughout its tenure. Consequently, the investment in the IPO of a Mutual Fund provides investors with the benefit of diversification as the fund owns shares of not only one but a larger number of companies. Any loss in investment from a single company can be offset by the gain from other companies in holdings. The same is not true in the case of investment in IPOs of a single company.

Why investment in Mutual Funds should be an area of interest for the public and Capital Markets?

We have observed that the general investors are hesitant to invest in the stock market besides IPO. Which is understandable considering the frequent ups and down in NEPSE, not necessarily due to similar changes in the fundamentals of the company or country. Market volatility is the core feature of the secondary markets globally and is true for Nepal as well, but the magnitude of such changes in a short span of time and the reasons behind such changes may affect the psyche of investors. Hence, in such a dynamic market, investors need to be aware of the fundamentals of investee company, market scenario along with long term sustainability, investment scenario, and economic outlook of the country as well as globally. This complexity has caused a large number of investors/savers who are aware of the benefit of capital markets investment and that of long-term investments are shying away from the secondary market. Historical empirical data shows that the secondary capital markets have given more than 17% of annualized returns over the period of 10 years to the investors. To put in context, if you keep reinvesting the annual returns with the same return your investment will be 4.8 times in 10 years. We feel larger population is not able to or is not taking advantage of this market. Mutual Funds can bridge this gap in the interest of the investors. Moreover, participation of large number of investors in the secondary market directly or indirectly through Mutual Funds is beneficial for the IPO market and the Capital Markets as a whole.

Just to numerically substantiate the need for mutual funds as the effective medium of investors' fund mobilization, we would like to present some data. The total number of applicants in the current IPO is around 16-18 lakhs (previously it used to be around 23-25 lakhs); total investor accounts maintained at brokers are around 13 lakhs and active online broker accounts are around 12 lakhs. Out of all those numbers, we hear active investors in the secondary market, at the current scenario, is just around 1 to 1.5 lakhs. This is a huge gap that needs to be filled for the healthy and active secondary markets and for the active Capital Markets. We strongly believe that this gap can be addressed through Mutual Funds. Further, through mutual funds, we can make avail of the benefits of the Capital Markets to the larger population including investors investing in both small and large funds.  

What is NMB Sulav Investment Fund – II? What does the new scheme have to offer to its investors?

NMB Sulav Investment Fund – II is the fifth mutual fund scheme under NMB Mutual Fund sponsored by NMB Bank Ltd. and managed by NMB Capital Ltd. It is a closed-end growth-oriented fund where the majority portion of the fund is invested in selected shares of performing companies for value-based capital gain returns. The remaining portion of the fund also invests in fixed return instruments for diversification of risk and for capital protection. Being a closed-end scheme the investment horizon of NMB Sulav Investment Fund – II is 10 years. The objective of NMB Sulav Investment Fund – II is to pool funds from small retail investors and invest in the shares of companies based on their management expertise. The return generated from such investments shall be distributed to the unitholders and the undistributed return shall be reinvested with the expectation of further capital appreciation.

Based on the projection of NMB Sulav Investment Fund – II, it shall distribute consistent dividends to its unitholders. The first year after the inception of the scheme shall be majorly dedicated to constructing the portfolio, thus the scheme does not project to pay any cash dividend to its unitholders during the first year. Instead, the company projects to provide value to its unit holders in terms of capital appreciation. The company plans for a consistent dividend distribution policy for its unitholders. Consequently, it plans for a distribution of 10% from the second year until maturity. The remaining portion of the return is projected to be reinvested in the fund itself to reap the maximum benefit of long-term equity investment. In 10 years' time, the mutual fund plans to give a 24.20% simple annual return (15.8% in compounding annual return) both in terms of cash dividend and capital gain returns. However, this is a projection made based on 10 years return of the capital markets of Nepal and hence is subject to change.

Currently, there are multiple fund managers operating different schemes. Why investors looking to invest in mutual funds should choose NMB Capital Ltd. as their trusted Fund Manager?

While investing in a mutual fund, it is the investor's choice in regards to the objective of the fund, fund manager, and of course the market scenario. In this regard, I would like to mention a few facts about the mutual fund management history of NMB Capital. NMB Capital Ltd. launched its first closed-end mutual fund scheme “NMB Sulav Investment Fund – I” in 2014 with an investment term of 5 years. Since then, the company has launched 2 closed-end mutual fund schemes namely “NMB Hybrid Fund L – I” and “NMB 50” and one open-end mutual fund scheme “NMB Saral Bachat Fund – E” and all these schemes are currently in operation. The cumulative fund management experience of NMB Capital since its first launch spans 8 years and the total asset under management of the three mutual fund schemes currently in operation is approximately NPR 4 billion. The fund management quality of NMB Sulav Investment Fund – II has been rated as the highest compared to its industry standard as rated by ICRA Nepal which is “AMC Quality 2” indicating high assurance of the management quality.

Schemes in operation under NMB Mutual Fund and their performance

The capital market of Nepal is in the emerging phase. Consequently, the presence of companies and the industrial sector is limited. Despite these challenges NMB Capital Ltd. has been able currently to operate 2 Closed-end mutual fund schemes namely “NMB Hybrid Fund L – I (NMBHF1)” and “NMB 50 (NMB50)” and one open-end mutual fund scheme “NMB Saral Bachat Fund – E (NMBSFE)”.

The company has been able to plan for the launch of its mutual fund products of different natures based on the need of different market conditions and dynamics.

NMB Hybrid Fund L – 1 which is a closed-end scheme of hybrid nature was launched near the peak of 2016. The asset price had significantly increased during the almost 4 years bullish rally of that period. As the name suggested the hybrid fund focused its investment in both equity and fixed instrument in almost the same proportion. The return from the fixed instrument provided a hedge against the bearish rally of the NEPSE index. As of 31^st Ashad 2079, the Net Assets Value (NAV) of the scheme was at NPR 13.12 generating a total return of 75% against only a 14% rise in the benchmark index since the inception of the scheme. The scheme has been able to distribute cash dividends of 10%, 8%, and 20% to its unitholders for FY 75/76, 76/77, and 77/78 respectively. Further, NMB Hybrid Fund L – I has recently announced a 21.05263% cash dividend to its unitholders for FY 78/79.

NMB 50 is the third closed-end mutual fund scheme offered by NMB Capital Ltd. to the public. The scheme was launched at the bottom of 2019. Expecting the market to bottom and viewing huge potential for capital appreciation NMB Capital planned for the launch of the growth scheme. Being a growth scheme NMB 50 was brought into the market with an objective to invest majorly in equity instruments and some portion in fixed income instruments for risk diversification. NMB 50 as the name suggests invests in shares of 50 or fewer companies with good fundamental history and business potential. As of 31^st Ashad 2079, the Net Assets Value (NAV) of the scheme was at NPR. 13.28 generating a total return of 64% against a 68% rise in the benchmark index since the inception of the scheme. The fund has been able to generate a comparable market return. The scheme has distributed cash dividends of 5% and 30% for FY 76/77 and 77/78 respectively. Further, NMB 50 has also recently announced a 21.05263% cash dividend to its unitholders for FY 78/79.

NMB Saral Bachat Fund – E is the fourth mutual fund scheme and first open-end scheme offered by NMB Capital Ltd. Being an open-end scheme it has no fixed tenure and has been launched with the objective of long-term capital appreciation. It is a growth-oriented scheme that majorly focuses on investment in equity instruments and some proportion in fixed instruments for risk diversification. Since almost nine months of its operation, as of 31^st Ashad 2079, the Net Assets Value (NAV) of the scheme was at NPR. 9.11 generating a loss of 9% against a loss of 26% in the benchmark index NEPSE in the same period.