How does Mutual Fund work in Nepal

How does Mutual Fund work in Nepal

In Nepal, mutual funds work by pooling money from various investors and investing it in a diversified portfolio of assets such as stocks, bonds, and other securities. The primary goal is to generate profits for the investors who contribute to the fund. Professional fund managers handle the investments, aiming to maximize returns while managing risks.

Types of Mutual Fund in Nepal

          Open Ended Mutual Fund

Open-ended mutual funds offer flexibility, allowing investors to purchase or sell units directly from the fund at any time. The number of units in the fund is not fixed, as it can issue more units to new investors and buy back units from existing investors.

Each unit is assigned a Net Asset Value (NAV), which is calculated daily based on the fund’s total net assets. Open-ended funds are known for their high liquidity, making it easy for investors to invest or withdraw money as needed. To explore the best open-ended mutual funds, you can visit mutual fund manager’s website like that of NIC ASIA Capital or check the official websites of other mutual fund operators in Nepal for details on performance, fees, and other specifics.

          Closed Ended Mutual Fund

Closed-ended mutual funds issue a fixed number of units, which are listed and traded on the stock exchange. Once the units are sold, investors cannot purchase or redeem them directly from the fund. Instead, units must be bought or sold on the secondary market through the stock exchange. These funds typically have a defined time horizon and may offer lower liquidity compared to open-ended funds, as trading depends on the availability of buyers and sellers in the market. However, they can be a good choice for investors looking for longer-term investments with fixed durations.

Regulatory Framework

Role of Securities Board of Nepal SEBON

The mutual fund industry in Nepal is regulated by the Securities Board of Nepal (SEBON), which ensures that all companies operate within the legal framework. SEBON plays several key roles to maintain integrity and transparency in the mutual fund sector:

• Regulation and Approval: SEBON regulates and approves mutual funds, ensuring they comply with established laws and guidelines.
• Framework Development: It provides a comprehensive framework for fund management, guiding the operations of mutual funds.
• Monitoring and Reporting: Fund managers are required to frequently submit performance reports to SEBON, increasing transparency and accountability.
• Investor Safeguards: SEBON protects investors by enforcing rules, addressing complaints, and providing a redress mechanism to resolve mutual fund-related disputes.
• Public Awareness: It promotes awareness of mutual funds and their benefits, encouraging more participation in the capital market.

As the primary regulatory body for Nepal’s mutual fund industry, SEBON ensures that mutual funds operate with integrity and uphold high standards. Its ultimate objective is to promote and develop a robust capital market in Nepal.

How a Mutual Fund Works in Nepal

Mutual funds in Nepal operate by pooling money from multiple investors to create a large investment fund managed by a professional fund manager. Here’s how it works:

Pooling of Funds 

Investors contribute money to the mutual fund at the beginning by purchasing units at the NPR 10. The money collected from all investors is pooled together to form a single, large fund. This pooled fund allows the mutual fund to make diversified investments that individual investors might not be able to achieve independently.

Investment Process

The pooled funds are allocated by the fund manager into various asset classes, such as equities and fixed-income securities, to maximize returns while managing risk.

Equities (Stocks): These are included in the portfolio to achieve higher returns, but they carry higher risk due to market fluctuations.

Fixed-Income Securities (Bonds): These are safer investments, providing steady interest income and balancing the volatility of equities.

This diversification strategy helps minimize overall risk and aims to deliver optimal returns for investors.

NAV (Net Asset Value) Calculation 

The Net Asset Value (NAV) represents the per-unit value of a mutual fund and is calculated daily. It is determined by subtracting the fund’s liabilities (such as fees) from its total assets (stocks, bonds, etc.) and dividing the result by the total number of units outstanding.

• If asset values rise: The NAV increases, reflecting good performance.
• If asset values fall: The NAV decreases, showing a decline in performance.

Investors use NAV as a key indicator to evaluate the performance of their investments in the mutual fund.

Dividend Distribution 

Dividends represent the income earned by the mutual fund from sources such as interest on bonds or dividends and capital gains from stocks. These profits are distributed to investors based on the type of fund and its distribution policy, which occurs annually.

When dividends are distributed, investors typically have two options:

• Cash Payout: Dividends are paid directly to the investor.
• Reinvestment in Case of Open-Ended Mutual Fund: Dividends are used to purchase additional units of the mutual fund, increasing the total investment.

Reinvesting dividends allows investors to benefit from compounding, which can significantly grow their investment over time.

Tax Implications on Mutual Fund Investments in Nepal

In Nepal, mutual fund investments are subject to tax obligations on both capital gains and dividends. Here’s a breakdown of how these taxes apply:

1. Tax on Capital Gains

Capital gains refer to the profit earned from selling mutual fund units at a price higher than the purchase price. In Nepal, the tax on capital gains depends on the type of investor and the holding period:

• For Individual Investors (Sole Traders):
  • 5% Capital Gains Tax: Applies if the holding period is more than a year.
  • 7.5% Capital Gains Tax: Applies if the holding period is less than a year.

• For Institutional Investors:
  • 10% Capital Gains Tax: Applies irrespective of the holding period.

2. Tax on Dividends

Dividends distributed by mutual funds are also subject to withholding tax, and the rates differ for individuals and institutions:

• For Individual Investors: A 5% withholding tax is deducted from the dividend amount. This tax is paid directly by the mutual fund company to the government.
• For Institutional Investors: A 15% withholding tax is levied on dividends.

Recent Trends and Future of Mutual Funds in Nepal

Growth of the industry in recent years

The mutual fund industry in Nepal has experienced notable growth in recent years, largely driven by increased investor participation. Greater awareness of unit-linked products, higher returns from equity markets, and the introduction of new mutual fund schemes have encouraged more individuals to explore this investment option. Younger investors, in particular, view mutual funds as an easy and accessible way to invest in stocks and bonds without directly entering the market. This trend has contributed to a steady increase in the Assets Under Management (AUM) for mutual funds in Nepal, reflecting the sector’s positive trajectory.

Impact of technology on the mutual fund sector

Technology has significantly reshaped the mutual fund sector in Nepal, making the investment process more accessible and efficient. The availability of mobile and internet platforms now allows investors to open accounts and manage their portfolios remotely, eliminating the need for in-person interactions. Online tools and calculators have further enhanced user experience by enabling comparisons between funds, performance monitoring, and informed decision-making. These technological advancements have lowered barriers to entry, attracting a more diverse group of investors while fostering greater engagement and trust in the mutual fund industry.

Future outlook for Mutual Funds in Nepal

The future of mutual funds in Nepal looks promising, with expectations of increased participation from both new and experienced investors. As financial literacy continues to grow, more Nepalis are likely to view mutual funds as a reliable means of achieving their financial goals. The Securities Board of Nepal (SEBON) plays a crucial role in supporting this growth by providing regulatory oversight and fostering investor confidence. Furthermore, the expansion of Nepal’s economy and the development of its capital markets will create new opportunities for mutual funds to flourish. As these trends take shape, mutual funds are set to become a cornerstone of financial planning, helping investors diversify portfolios, build wealth, and achieve long-term financial objectives.

FAQs

1.  How do unit holders get returns from mutual fund investments?

Unit holders earn returns from mutual fund investments through two main avenues: dividends and capital appreciation. Dividends are distributed based on the income generated by the fund’s investments, while capital appreciation refers to the increase in the value of mutual fund units over time.

2.  How much tax does an investor have to pay for dividends distributed by mutual funds?

In Nepal, individual investors must pay a 5% withholding tax on dividends received from mutual funds. This tax is deducted at the source by the mutual fund company before distributing the dividend. For institutional investors, the withholding tax on dividends is 15%.