How to Establish a Mutual Fund in Nepal

 Mutual funds have opened new opportunities to investors and imparted much-needed liquidity to the system. In this process, they have challenged the hitherto dominant role of commercial banks in the financial market and national economy. It is one of the best platforms for small investors to invest their money.

Table of content

• What is Mutual Fund?

• How to establish a Mutual Fund?

• Types of Mutual Funds

• Net Asset Value (NAV) of a Mutual Fund Scheme

What is Mutual Fund?

Mutual funds are trusts that pool together resources from small investors to invest in capital Market instruments like Shares, debenture, bonds, treasury bills, commercial paper, etc.

The role of mutual funds in the financial market is to provide access to the stock market-related investments to:

• people with less money in their pocket
• people with less knowledge
• people with less time
• mutual funds also help investors with the step-by-step monthly savings of smaller amounts.

How to establish a Mutual Fund?

In Nepal, mutual funds are established under securities Act 2063 and mutual fund regulations, 2067. As per Rule 3 of mutual Fund Regulations, a body corporate with the following criteria is eligible for establishing a mutual fund:

• Having minimum paid-up capital equal to one billion rupees.
• Having completed five years of operation of business subject to its objectives,
• Having earned a profit for the last three years continuously,
• Having paid-up capital not less than its net worth,
• The body corporate or its promoters and directors should not be one who has been convicted and punished against fraud or criminal offense of moral turpitude,
• Have not to remain on the black list of credit information bureau or any other regulating body.

Fund Sponsor

The body corporate which establishes mutual funds is called fund sponsor. The role of the sponsor is similar to that of a promoter of a company, who provides the initial capital and appoints the fund manager/Asset management company ( AMC). 

Fund Manager (Asset Management Company)

The asset management company should be licensed from SEBON. It manages the affairs of mutual funds and it should operate the schemes of such funds. Generally, Merchant banking companies have been acting as fund managers.

Fund Supervisors

Fund sponsors also appoint a group of professionals to supervise the mutual fund and protect the unit holder's interest. They are called fund supervisors.

Types of Mutual Funds

Open-Ended Mutual Funds: Open-Ended Scheme does not have a maturity period. These schemes are available for subscription and repurchase on a continuous basis. An investor can conveniently buy and sell units. The price is calculated and declared daily. The calculated price is termed NAV. The buying price and selling price is calculated with certain adjustment to NAV. The key feature of the scheme is liquidity

Close Ended Mutual Funds: Close Ended scheme has a stipulated maturity period normally 5 to 10 years. The scheme is open for subscription only during the specified period at the time of launch of the scheme. Investors can invest at the time of initial issue and thereafter they can buy and sell from the stock exchange where the scheme is listed. The NAV is generally declared every week.

Net Asset Value (NAV) of a Mutual Fund Scheme

Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the fund, in net asset terms. It is computed by dividing the net assets of the fund by the numbers of units that are outstanding in the books of the fund.

 

This is the value per unit of a scheme on a particular day, called the valuation day. It is the value of the fund. The investor's subscription is treated as the capital in the balance sheet of the fund and the investments on their behalf are treated as their assets.

since investments are marked to market, the value of the investments for computing NAV will be at market value. NAV of mutual funds plays an important role in investors' decisions to buy or sell their units. Analysts use NAV to find yield on the schemes.

Hope you enjoy reading this blog post.

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Keep Learning, Keep Investing.

Have a great time ahead.

Thank You.