MUTUAL FUNDS

REPORT ON PROSPECTS OF MUTUAL FUND

The report has expressly tried to explain the pros
and cons of development of mutual fund and how
it can be a major breakthrough in the utilization of
freeze of the financial resources of Nepal.
Prepared by: Diwas Agasti

Acknowledgment
I am very thankful to those people who have acknowledged my
report and assisted me in the preparation of it through their active
participation. The report contains data which I collected through a
questionnaire survey from different banks and financial institutions,
students and faculty members of different educational institutions.
Therefore I would like to thank every single person who have
motivated me in preparing this report and helped me analyze my
findings.

Contents
Understanding mutual fund
What is mutual fund?
Origin of mutual fund
How does it operate?
Its pros and cons
Accounting and Calculation
Survey
Methodology
Findings
Prospect of mutual funds in Nepal
Conclusion

Understanding mutual fund

What is a mutual fund?
Mutual fund, etymologically, means a collective fund of the
stakeholders who share a mutual objective. The collective fund
requires a fund manager. A fund manager is a corporation set up to
utilize the fund collected from the stakeholders and invest it in
different financial instruments in the markets. These instruments
may be equity, bonds, money market instruments.

In the beginning
Historians are uncertain of the origins of investment funds;
some cite the closed-end investment companies launched in the
Netherlands in 1822 by King William I as the first mutual funds,
while others point to a Dutch merchant named Adriaan van Ketwich
whose investment trust created in 1774 may have given the king
the idea. Ketwich probably theorized that diversification would
increase the appeal of investments to smaller investors with
minimal capital. The name of Ketwich's fund, Eendragt Maakt Magt,
translates to "unity creates strength". The next wave of nearmutual
funds
included
an
investment
trust
launched
in Switzerland in 1849, followed by similar vehicles created
in Scotland in
the
1880s.

The idea of pooling resources and spreading risk using closedend investments soon took root in Great Britain and France, making
its way to the United States in the 1890s. The Boston Personal
Property Trust, formed in 1893, was the first closed-end fund in
the U.S. The creation of the Alexander Fund in Philadelphia in 1907
was an important step in the evolution toward what we know as the
modern mutual fund. The Alexander Fund featured semi-annual
issues and allowed investors to make withdrawals on demand.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust
in Boston, Massachusetts, heralded the arrival of the modern
mutual fund in 1924. The fund went public in 1928, eventually
spawning the mutual fund firm known today as MFS Investment
Management. State Street Investors' Trust was the custodian of the
Massachusetts Investors' Trust. Later, State Street Investors started
its own fund in 1924 with Richard Paine, Richard Saltonstall and
Paul Cabot at the helm. Saltonstall was also affiliated with Scudder,
Stevens and Clark, an outfit that would launch the first no-load
fund in 1928. A momentous year in the history of the mutual fund,
1928 also saw the launch of the Wellington Fund, which was the
first mutual fund to include stocks and bonds, as opposed to direct
merchant bank style of investments in business and trade.

Regulation and Expansion

By 1929, there were 19 open-ended mutual funds competing
with nearly 700 closed-end funds. With the stock market crash of
1929, the dynamic began to change as highly-leveraged closed-end
funds were wiped out and small open-end funds managed to
survive.
Government regulators also began to take notice of the
fledgling mutual fund industry. The creation of the Securities and
Exchange Commission (SEC), the passage of the Securities Act of
1933 and the enactment of the Securities Exchange Act of 1934 put
in place safeguards to protect investors: mutual funds were
required to register with the SEC and to provide disclosure in the
form of a prospectus. The Investment Company Act of 1940 put in
place additional regulations that required more disclosures and
sought
to
minimize
conflicts
of
interest.

The mutual fund industry continued to expand. At the

beginning of the 1950s, the number of open-end funds topped 100.
In 1954, the financial markets overcame their 1929 peak, and the
mutual fund industry began to grow in earnest, adding some 50
new funds over the course of the decade. The 1960s saw the rise
of aggressive growth funds, with more than 100 new funds
established and billions of dollars in new asset inflows.
Hundreds of new funds were launched throughout the 1960s
until the bear market of 1969 cooled the public appetite for mutual
funds. Money flowed out of mutual funds as quickly as investors
could redeem their shares, but the industry's growth later
resumed.

Recent Developments
In 1971, William Fouse and John McQuown of Wells Fargo Bank
established the first index fund, a concept that John Bogle would
use as a foundation on which to build The Vanguard Group, a
mutual fund powerhouse renowned for low-cost index funds. The
1970s also saw the rise of the no-load fund. This new way of doing
business had an enormous impact on the way mutual funds were
sold and would make a major contribution to the industry's success.
With the 1980s and '90s came bull market mania and
previously obscure fund managers became superstars; Max Heine,
Michael Price and Peter Lynch, the mutual fund industry's top
gunslingers, became household names and money poured into the
retail investment industry at a stunning pace. More recently, the
burst of the tech bubble and a spate of scandals involving big
names in the industry took much of the shine off of the industry's
reputation. Shady dealings at major fund companies demonstrated
that mutual funds aren't always benign investments managed by
folks who have their shareholders' best interests in mind.

Types of mutual fund

Mutual fund can be segregated as following:

In terms of functionality of the scheme, mutual fund can be of

two types. They are:
Bases
Meaning

Liquidity

Scheme

Open ended
Mutual fund with
no specified
maturity period is
a open ended
mutual fund.
Entry and exit in
the scheme is
possible at any
time.

Closed ended
Mutual fund with a
specified life span to
operate is a closed
end mutual fund.

These funds
include income
funds(bond) and
also invest in

These funds include

growth funds(equity)
as they focus on
capital appreciation.

Investors can buy

stocks in Initial
Public Offering(IPO)
or from stock
exchange.

balanced fund.
Investment

It has unlimited
investment.

It has limited
investment.

How does it operate?

Mutual fund is merely a scheme. Therefore it needs an
operator. A body corporate that operates the scheme of mutual
fund is called a fund manager. Mutual fund actively, through its
fund manager, pools money from the investors and invests it in
securities. The return obtained from the investment is then
transferred to the investors in proportionate basis of share
holdings.
Its operating cycle can be illustrated as:

R
e t
u r
n
s

In
v e
s t
o r
s
S e
c u r
it ie
s

F u n
d
M a
n a g
e r

Key players in the game

In order to complete this cycle and provide shareholders with
the return they are supposed to receive, some players enter into
this game of investment. These players are listed below with their
roles:
Sponsor

Asset
managemen
t company

Fund
supervis
or

Unit
holder

Deposito
ry

A company
registered
under
companies
act that
establishes
mutual
fund.

A company
registered
under
companies act
that manages
the investment
in mutual fund.

A fund
supervisor
is a
guardian
that holds
the
properties
of the
mutual
fund for
the benefit
of the unit
holders.

A person
who holds
the stock
of mutual
fund and is
viable of
any return
distributed
by the
fund. They
are the
shareholde
rs of the
fund.

It is
responsible
for record
keeping,
dividend
distribution
etc.

Pros and Cons of mutual fund

There are many advantages and disadvantages of a mutual
fund. It is different investment than investment in a normal share
market.
Some of its advantages are:

1.

Professional management:

The funds are managed by skilled and professionally

experienced personnel with a backup by research team.
Therefore investors can be secured against the risk of default.

2.

Diversification:

Investment in securities involves different types of risk

namely systematic risk and unsystematic risk. Systematic risk
is non diversifiable risk but unsystematic risk can be diversified
in such a way that it will give a higher return. Therefore
securities are diversified in mutual fund.

3.

Convenient administration:

There is no any time consuming administrative work as no

share transfer is required and many mutual fund even provide
direct form filling to buy its units.

4.

Higher returns:

Generally mutual funds provide higher returns compared

to investment in any other shares as the professional
personnel diversify the investment into high earning portfolio.

5.

Low cost of management

The cost of management of the fund is very low than the

floating costs involved in trading of other securities.

6.

Liquidity:

In all open ended funds the mutual fund directly sells and
repurchases the units and for closed end fund units are listed
in stock market to provide liquidity.
Few other advantages of it include transparency, highly
regulated, flexibility, etc

Drawbacks of mutual fund

1.

No guarantee of return

A mutual fund might do better than the stock market but

this doesnt lead to the increase in investors wealth. Mutual
fund investment may erode in value.

2.

Diversification

Though diversification minimizes risk, it doesnt ensure a

high return than an investor can achieve. For example if a bond
doubles in value, the mutual fund itself wont double in value as
the bond is only a part of a mutual fund.

3.

Selection of proper fund

An investor can select a share better than stock as there

are many factors to be compared with while selecting it but for
selecting a fund, we only have a past trend analysis.

4.

Cost factor

Mutual funds carry a price tag. Fund managers are the

highest paid executives. While investing an entry load is to be
paid and while exiting, an exit load is to be paid.

5.

Unethical practices

Mutual funds may not play fair game. Each schemes may
sell some of the holdings to its sister concerns for substantive
notional gains and posting NAVs in a formalized manner.

Accounting and Calculation

A fund of a mutual fund is known as a unit. The fund manager
calculates the Net Assets Value (NAV) of the unit in daily, weekly or
monthly basis. Net Assets refers to the assets that remain after
deducting any allowable deductions like expenses and liabilities.
When the Net Asset is divided by the outstanding number of unit
standing on the date, we get the NAV of a unit. The unit of the fund
are bought and sold on the basis of this NAV.

NAV=

Net Assets of the scheme

Number of units outstanding

Where,

Net Assets=MV of investment + Receivables+ Accrued Income+Other AssetsAccrued ExpensesPayablesOther

Survey
Methodology:
In order to complete my research on the public of Nepal
regarding their knowledge about mutual fund, its operation,
strengths and weaknesses, I used questionnaire method as well as
direct personal interview with different students and faculties of
colleges. I inquired with the senior officials of Banks and Financial
Institutions in Kathmandu Valley like Siddhartha Limited which is a
fund manager of the mutual fund growth scheme of Siddhartha
Bank Ltd.

Findings:
In my survey I have discovered following points that I would
like to share:
i.
ii.
iii.
iv.

v.
vi.
vii.

Public prefers to hoard their income rather than invest it in

mutual fund.
Public is unaware of the establishment of mutual fund
Many interested corporations are there who want to establish a
mutual fund but are far away from its initiatives.
People do not feel secured to let somebody else decide how to
utilize their money though they might be experienced
personnel.
People do not find the schemes of the mutual fund operating
now, attractive enough to make investment.
The Inland Revenue Department is silent if mutual fund is a Tax
Exempt Entity or not.
Some people are interested in investing but they are not sure
where and how they can invest.

Prospects of mutual funds in Nepal

Operation:
The provisions for establishing a mutual fund is extracted
below from the mutual fund rules, 2067.
Any one or more than one body corporate may establish
Mutual Fund. The qualification of body corporate willing to establish
a Mutual Fund shall be as follows:(a)
A body corporate established for performing
financial business pursuant to prevalent laws,
(b)
Having minimum paid up capital equal to one
Billion rupees.
(c)
Having completed five years of operation of
business subject to its objective,
(d)
Have earned profit for last three years
continuously,
(e)
Having paid up capital not les s than its
net worth,
Clarification: For the provision of this clause
"net-worth" means the aggregate value of the
paid up equity capital and free reserves
(excluding reserves created out of revaluation),
reduced by the aggregate value of accumulated
losses and deferred expenditure not written off
including miscellaneous expenses not written
off.
(f)
The body corporate or its promoters and
Directors should not be one who have been
convicted and punished against fraud or
criminal offence of moral turpitude,
(g)
Have not remain in the black list of Credit
Information Bureau or any other regulating
body,
(h) Have satisfied other qualification as prescribed

by the Board from time to time.

At present there are few mutual funds in Nepal. The mutual fund
scheme proposed by Citizen Investment Trust (CIT) is a open ended
mutual fund scheme and that proposed by Siddhartha Capital
Limited (SCL) is a closed ended mutual fund.
The detail analysis of these two mutual funds, in my view will
practically help us know the prospects of mutual fund in Nepal.

Bases

Nagarik Ekanki
Yojana,2052

Siddhartha
investment
growth scheme-1

Type
Fund
manager
Own
investment
Investment
sectors

Open ended
Citizen
Investment
Trust
50 lakhs By CIT

Closed ended
Siddhartha
Capital
Limited
51%
holding
by
Siddhartha Bank Ltd
95%
in
stocks
listed
in
stock
exchange.
5% deposit in BFI.
Other authorized
area.

Risk
Liquidity

Securities issued by
Government
of
Nepal.
Shares, debentures,
bonds
of
body
corporate.
T-bills
of
GON,
Bonds of NRB, etc.
Securities
guarantee,
seed
financing.
Term loans
Minimum risk due to
portfolio scheme.
Units can be sold to
the
fund
and
purchased
as
the
value prescribed by

Minimum risk due to

portfolio scheme.
Units can be sold and
bought from stock
exchange.

the mutual fund.

Manageme 1.5% of Net Asset
nt fee

1.75%
of
Net
Asset,0.5% of Net
Asset for depository
fee and 0.2% for
supervisory cost.
Investment Seed financing by CIT Rs 40 crore
Rs 50 lakh
Term
Infinite
5 years

Conclusion:
I would like to conclude my report with a point that mutual
funds help different sectors of the markets and also to the
government. Few of those contributions are:
a. It helps in utilizing the money of public that has been hoarded.
b. It directly increases the index of the stock market.
c. It creates employment opportunities.
d. It makes the investment of the people secure.
Therefore with our own discretion, we can choose to invest in
mutual fund and become a part of the market.