How does mutual fund work in share market in Nepal

Mutual funds are investment tools designed to help individuals as well as institutions participate in the stock market without directly buying equities from the secondary market. . They work by pooling money from multiple investors and using it to invest in a diversified portfolio of shares, bonds, or other securities. Below is an expanded explanation of how mutual funds operate in Nepal:

How Mutual Funds Operate in the Share Market

Here’s a step-by-step explanation on how mutual funds operate in the share market :

1. Pooling of Investor Funds

Mutual funds start from pooling of funds from many investors with the common dream of gaining an income from their investments. They usually may not have the time, skills, or even capital to directly oversee their investments. With many people contributing their money, the mutual fund manages to get a lot of money which can then be invested in the financial market. This also provides an avenue for getting opportunities especially for smaller investors most of which they can’t access independently.

2. Professional Fund Management

The mutual fund collects money that is then handled by professionals that invest and analyse the financial market. Such fund managers are tasked with the role of deciding where this collected money should be invested with more emphasis on potential returns and potential risks. They investigate market patterns, assess the financial status of the corporations and make the investments in accordance with the fund direction. This professional management keeps the investors on the positive side by giving them professional investment results which they would have otherwise been entrusting the management of the investment themselves.

3. Investing in Shares via Mutual Funds

After the fund managers have decided where to invest, they use the funds collected from investors; to purchase common stocks, fixed income instruments or debt instruments. or any other securities. For instance they can put their money in equities through NEPSE or participate in government securities or other securities.

Also read:

1.  Investment Modes in Mutual Fund
2. How does Mutual Fund work in Nepal

4. Net Asset Value (NAV)

Net Asset Value or NAV by definition is an important parameter in mutual funds. It means the Net Asset Value per Unit of the mutual fund and is computed on a daily basis (in case of open ended Mutual Fund Scheme) depending on the total factors such as total value in the fund, debts it owes and number of units in circulation. For instance if the total asset of the mutual fund is NPR 1 crore and the number of units floated is one lac then the NAV will be one hundred NPR per unit. NAV represents the mutual fund and the mutual fund’s NAV either rise when it goes up or declines when it drops. This policy enables investors to keep abreast with their investment portfolio frequently.

5. Buying and Selling Mutual Fund Units

Mutual funds units can be bought when the fund opens its subscription or later on the stock exchange if the fund is floated on the stock exchange. In the case of Open ended scheme, the investor can directly purchase/ sell the units through the fund manager as it is not listed at NEPSE. Likewise, they can also dispose of their units when they want to deploy from the identified investment and at the prevailing NAV or market price. Such an aspect of flexibility is important since an investor can decide to invest in the mutual fund or cut on his/her loss depending on his/her need and or market performance.

Role of Mutual Funds in the Share Market

Mutual funds play a significant role in the share market by supporting its functioning and growth. They benefit both individual investors and the broader financial system. Here's an explanation of their role:

1. Market Liquidity

These funds help bring about a far greater amount of liquidity in a share market because they are always involved in purchase and sale of securities. Due to mutual fund activities, purchasing shares of mutual funds help a company to raise capital because it injects money into the market. In the same way, when mutual funds are disposing of their shares, they provide an avenue by which other people can purchase them. These constant activities make the market always active, and help to realise securities without having to cause shifts in the price.

2. Diversification and Risk Management

Diversification is another way through which mutual funds manage to lower risks for investors. While ordinary savings are invested in a single business venture, mutual funds invest in many businesses, commodities, securities, and types of businesses. This diversification reduces risk—the case that one company will perform badly is usually offset by other companies in the portfolio performing well. Due to proper management of risks, mutual funds create an investor friendly environment in investing in the share market.

3. Access to a Broad Range of Securities

Basically, through mutual funds, investors mobilise their resources in securities like shares, bonds and others. Some of them may be expensive or may not be easily available for small investors or even individuals without some expertise in the market. Mutual funds also assist those with many investors to gather together their money so they can buy securities that are usually not possible for an individual to afford. These accesses offer ways of possibly getting improved returns and a more diversified portfolio.

4. Contribution to Market Growth

Mutual funds play a really important role in the total development of the market growth. In other cases, they combine money and put it in different securities, thus assisting firms to obtain funds hence business enlargement and ultimately economic growth. Further, mutual funds bring more people to share market investing with some potential and new share market customers being those who are unsure or lack expertise in investing. This enhanced participation raises market turnover, improves institutions’ stability and fosters sustained market development.

How to Invest in Mutual Funds in Nepal’s Share Market

Investing in mutual funds in Nepal is straightforward and offers various ways for investors to participate. Here’s a step-by-step explanation of the methods:

1. Purchase of units during New Fund Offer (NFO)

In Nepal investors can directly buy mutual funds through New Fund Offer for close ended mutual fund and later through the Nepal Stock Exchange (NEPSE) or for open ended mutual fund at any time through the fund manager (either through online platform or visiting the office of the Fund Manager/ Fund Sponsor). In close-ended funds units are available at the NFO period at the face value and post listing at NEPSE, units can be purchased through the secondary market In regard to open-ended funds, units are also available on a continuous basis and the cost per unit is expressed by net asset value and calculated on a daily basis with reference to the total value of the fund assets.

2. Trading on the Stock Exchange

Close-ended mutual fund units are Exchange traded securities which are listed on the Nepal Stock Exchange (NEPSE) after going through the New Fund Offer (NFO) phase. These units once issued can be traded on stock exchange as any ordinary shares of the company are traded. The cost of the units that are transacted on NEPSE could therefore be more or less than the NAV since it is arrived at by the mechanism of supply and demand. There are two options for the traders to invest during the market hours; either buy or sell orders through registered stock brokers. In contrast to open-ended funds, the investors cannot approach the fund management company directly and purchase or sell units after the NFO.

3. Online Platforms and Stockbrokers

The mutual fund units can be bought directly through online investment  platforms (in case of open ended Mutual Fund Scheme) or from licensed stock brokers (in case of closed ended Mutual Fund Schemes). there are the licensed stockbrokers who can assist investors to purchase units directly where the fund is a closed-end fund.

Frequently Asked Questions (FAQ)

1. How is NAV calculated for mutual funds?

NAV is calculated by subtracting the fund’s liabilities from its assets and dividing the result by the total number of outstanding units.

2. What happens if the stock market crashes while I’m invested in a mutual fund?

If the stock market crashes, the value of your mutual fund may decrease as the fund’s assets are affected by the market downturn.

3. Can I redeem mutual fund units anytime?

You can redeem units anytime by visiting the Fund Manager’s office or through online in open-ended funds, but for close-ended funds, you must sell units on the stock exchange after the NFO period ends.

5. What is the minimum investment required for mutual funds in Nepal?

The minimum investment for mutual funds in Nepal varies by fund, but it generally starts at around NPR 1,000.