A security market, or financial f inancial market, can be defined as a mechanism for bringing together buyers and sellers of financial assets in order to facilitate trading (Sharpe, Alexander & Bailey, p.47). In other words security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Mutual fund is considered as an effective way of raising capital not only for commercial enterprises but also giving an opportunity for investment to each and every individuals and institutions. A mutual fund is a type of professionally prof essionally managed managed collective investment scheme that pools money from many investors to purchase securities. securities. While there is no legal definition of the term “mutual fund”. It is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. (www.wikipedia.org www.wikipedia.org)) It provides opportunity for mobilizing community savings for productive investment. The security market is a requisite for the sound development of an economy because it not only provides stable long-term capital for companies and an effective savings vehicle for the public, but also functions as an efficient effic ient tool for resource allocation. Nepal, one of of the least developed developed countries in the world has to make make different strategies and plans for collecting and mobilizing efficiently the available capital capital in the country. country. For the efficient securities securities market efficient allocation of capital is essential for the well-functioning of the economies. The need for an efficient securities market is a must for the efficient allocation of capital within economies. Mass participation in country’s industrialization process is is possible only through the efficient mechanism of securities market as it promotes p romotes efficient collection of small and scattered savings from the investors and provides returns to them in the form dividend (Adhikari, p.41). The financial intermediaries that link savings with the users of capital would be needed to make the mass participation possible and the securities market work more efficiently. These intermediaries are well acquainted of every aspect
related to the investment and of opportunities of employing funds profitably. They can go farther afield geographically; they know the personal reputation of would-be borrowers; they command expert advice of the highest quality. In this manner they can secure a higher return on the savings of individuals owing to superior knowledge and bargaining power (Grant, A.T.K., p.183). Mutual funds come right there. Mutual funds are simply a means of combining or pooling the funds of a large group of investors (Corrado & Jordan, p.88). The mutual fund having indirect assess to financial markets for individuals can be considered a financial intermediary. They represent a sensible and efficient vehicle for individual investors to participate in the market (Fisher & Jordan, p.654). The fund allows the investor to purchase a much diversified portfolio of securities for a small investment. It is impossible to purchase a much diversified portfolio of individual securities with a modest investment outside of a mutual fund.
1.2 Concept of Mutual Fund A company that manages the funds collected from the individual investors and by investing it in other security markets is an investment company. In other words, an investment company is a business that specializes in managing financial assets for individual investors. All mutual funds are, in fact, investment companies, however, not all investment companies are mutual funds (Corrado & Jordan, p.89). There are two primary forms of investment companies: open-end and closed-end companies. The fund itself will sell new shares to anyone wishing to buy and will redeem shares from anyone wishing to sell in the open-ended mutual fund. The fund simply issues open ended fund shares and then invests
the money received while buying the shares. The fund sells some of its assets and uses the cash to redeem the shares while selling the openended shares. As a result, with an open-end fund, the number of shares outstanding fluctuates through time. With a closed-end fund, the number of shares is fixed and never changes so in order to buy shares, one must buy them from another investor. Similarly, to sell the shares, one must sell them to another investor. Strictly speaking, the term “mutual fund” actually refers only to an open-end investment company. Nonetheless, particularly in recent years, the term “investment company” has all but disappeared from common use and investment companies are now generically called mutual funds (Ibid., p.90).
Mutual Fund History: The mutual fund industry in Nepal started about 15 years ago with the introduction of NIDC Capital markets which issued an open ended mutual fund, NCM Mutual funds, for Rs. 10 per unit in 1991/92. With the view of participation of small savers only in capital market cannot handle the intricacies of the stock market, the NCM First Mutual Fund 2050 was issued with the objectives to involve institutional players in the development of stock market and give stability to it. Its purpose was largely to stabilize the market and increase confidence in the financial markets. (KC & Pandey, July 2009). The buyers could buy maximum of Rs.100 million of the fund with face value of Rs.10 per unit and 100 units as minimum number purchased. The funds so collected were invested in equity, debentures, bonds and short-term tradable securities with 90 per cent of the amount collected to be invested in bonds, debentures and shares at maximum and the
investment in the short-term securities were limited to 30 per cent at maximum but not less that 10 per cent. The investment criteria were: 1.
The fund of this scheme would be invested in financially sound companies in general listed or to be listed.
2.
Fund should not be invested in risky business
3.
The fund looked for good returns from capital gain, dividend and interest
4.
Investment would be done in existing companies or newly privatized public entities
5.
Specific investment areas of the funds would be banking and financial institution, tourism, trading, construction areas, services and in manufacturing
6.
The funds involved in one company shall not be more than 10 -% of the total size of the fund
Current scenario: Currently two mutual fund investment exists in the security market of Nepal : Sidhartha mutual fund & Nabil growth fund Siddhartha mutual fund: After the “mutual fund regulation” was enacted by the SEBON in Nepal, in 2010, Siddhartha mutual fund came int existence. It is a closed ended fund and according to the mutual fund act it has structured itself with the Fund sponsor, Fund supervisor, Fund Manager and depository. Currently, Siddhartha bank is the fund sponsor, Siddhartha capital with 51% ownership of siddhartha bank and Depository is the institution established for the purpose of safekeeping of assets, keeping records of the unit holders of the scheme, transferring ownership, distributing dividends of the scheme etc. As per mutual fund
regulation fund manager can act as depository so siddhartha capital limited acts as the depository of Siddhartha mutual fund. Siddhartha capital is a growth fund. The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Nabil balanced fund: The Nabil balanced fund with NFO price per unit of rs 10 with total amount of 60,000,000 units was issued in the scheme named Nabil balance fund-I. Investors must hold at least 100 units but not more than 6,000,000 Units which has 5 years of maturity. The Nabil mutual fund has Nabil bank as the fund sponsor and Nabil Investment Banking Ltd. (Nabil Invest), a subsidiary of Nabil Bank has obtained licenses of Fund Manager & Depository in a mutual fund from SEBON and will be rendering the said services to the schemes of Nabil Mutual Fund. Nabil mutual fund is a balanced fund. The aim of balanced funds is to provide both growth and regular income. These schemes invest in both equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and rest in debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets and interest rates. However, NAV’s of such funds are likely to be less volatile compared to pure equity funds.
References: www.nabilinvest.com.np/doc/downloads/130315135523_NABIL%20BALANCED%20FUND%20I.pdf http://www.siddharthacapital.com/index.php/mutual-fund-basics http://nepalistock.blogspot.com/2007_08_01_archive.html
http://janroman.dhis.org/finance/Books%20Notes%20Thesises%20etc/LSE/Chap04.pdf
