Investment Companies

Kiran Thapa
Option for investing

 Deposit in Bank
 Loan to friend or relative on interest
 Property investments
 Investment in Bullion – Gold and silver
 Investment in capital markets
 Direct: Equity market and debt market
 Indirect: Mutual funds
Introduction to Mutual Fund
 Mutual fund is a type of financial institution that

issues shares to the public and received the

money.

 Collected money then invested in a wide range

of financial assets.

 Mutual fund received the interest, dividend and

capital gains and distributed to the investors

after deducting expenses.

 …contd.

Investment in shares of
investment companies
Fund Investment in

Capital gain Investment

Investor /loses by sales company Or
of shares Mutual funds

Portfolio of
investment
Cash flow in terms of
dividend or interest
and capital gain/loses Return

Direct investing
Functions
 
1. Professional management
2. Record keeping and administration
3. Diversification and divisibility
4. Low transaction costs
5. Transparency and Credibility
Structure of Mutual Funds

 Fund sponsor: Fund Sponsor must be

Commercial Bank as per mutual fund
regulation 2010 or 2067.
 Fund Manager: Fund manager is the
company established by Fund sponsor
with at least 51% ownership of the
Sponsor.
 
 Contd.
Depository: As per mutual fund
regulation 2010, the fund manager can
also act as depository. purpose of
depository are:
- safekeeping of assets,
- keeping records of the unit holders of
the scheme,
- transferring ownership,
- distributing dividends of the scheme
etc.
Structure of mutual fund
 Structure Contd.

 Fund supervisor:
•A group of minimum five different reputed professionals
with 10 year experience
•Qualification in the area of economics, commerce,
management, corporate law, finance and accounts with
experiences in the areas of commerce and industry,
securities markets, financial sectors, corporate law and
management .
•Fund supervisors are appointed by fund sponsor by
taking approval from the SEBON.
 Structure Contd.

 Major responsibilities are:

•approve the operation of the scheme
•monitor the activities of the fund manager
and depository
•monitor reporting of the scheme and protect
the interest of the unit holders of the scheme
in case of any violation of laws by the fund
manager and the depository.
Types of Mutual funds
 By structure:
 Open and Closed end fund

 By objectives:
 Growth/Equity Oriented Scheme (Growth fund)
 Income/Debt Oriented Scheme
 Balanced Fund
 Money Market or Liquid Fund
 Sector specific funds/schemes
Open end fund
 Varies number of shares
 No maturity period (Perpetual)
 No fixed capitalization
 Redeemable at any time
 Traded through company
 Trading at NAV per share
 Transaction occurs between company and investor
 High liquidity than closed end fund
 Example : open end fund
Name of scheme: NIBL Sahabhagita fund
Type of scheme: Open ended
Approved size of scheme: NPR 500 million
Seed capital : 15% of NPR 500 = 75 million
New fund offer : NPR 125 million
Par value per unit: Rs 10 per unit
Tradable price : Calculated NAV (daily basis)
Listed: Not listed at exchange
Traded : through co or various distribution
outlets
 Contd.
-buy /sell starts from: 3 months of allotment
-fund management fee: 1.25%
 Depository fees : 0.4% of applicable NAV
 Fund supervisor’s fee : 0.3% of applicable NAV
 Entry load: None
 Exit load

:1.5% of applicable NAV within 6 months

:1.25% of applicable NAV within 6-12 months
:1% of NAV within 12-18 months
:0.75% of NAV within 18-24 months
:Option available: Systematic Investment Plan (SIPs).
Return-reinvestment plan. Systematic withdrawal plan.
 Problem for practice
Suppose you purchased open end fund NIC Asia at NAV of Rs
9.5 at Jan 1, 2022. The depository fee is Rs 25 per transaction. You
sold this fund at Rs 10.5 at the end of January. There is exist fee of
1.5% if you sold before 3 years. After three years, there will be no
exit fee. There is no upfront fee at purchase of the fund.
a. Calculate the total purchase price if you purchase 1,000
units.
b. Calculate the total selling price at the end of 1 years (NAV at
the end of 1 year = 11). At the end of 4 years (NAV at the end
of 4 years = 12). Calculate the rate of return in year 1 and 4.
Ans: a. Rs 9,525; b. 10,810; 11,975; 13.49% & 25.72%
Closed end fund
 Fixed number of shares
 Fixed maturity period
 Fixed capitalization
 Redeemable at maturity
 Traded through stock exchange
 Trading at market price
 Transaction occurs between investors
 Low liquidity than open end fund
 Example: Closed end fund
Name of scheme: Siddhartha investment growth scheme – I
(SIGS-I)
Life of scheme: 5 years
Type of scheme: Closed end type
Offered amount: 500 million
Par value = Rs 10 per unit
Listed: At NEPSE and traded through brokers
Cost: Brokerage commission, DP fee, SEBON fee etc.
Traded at premium or discount to NAV
Redemption through company: At the end of maturity
Net asset value
 Present value of a mutual fund’s share
 Total value of securities - Liabilities
NAV 
Total share outstanding
 Calculated in daily basis. In case of Nepal, NAV
must be calculated on weekly basis.
 Investment decisions:
Cases Decision Reason
NAV per share > Market Price Buy Undervalued
NAV per share < Market Price Don’t Buy Overvalued
NAV per share = Market Price No action Correctly
priced
Example
Contd.
Class room practice
Mechanics of investing
 
 Closed end funds
Traded at market price (premium or discount to NAV)
Current Market Price - NAV
Premium (Discount) 
 
NAV
 Or, market price with premium = NAV (1+ premium rate)

market price with discount = NAV (1– discount rate)

 Open end funds

Traded at NAV per share – If it is traded through company

Traded at offering price – if it is traded through agent

Offering price = NAV/(1 – load fee)

Or, NAV = Offering price (1 – load fee)

Example
 Example
An open-end fund has a net asset value of
Rs 10.70 per share. It is sold with a front-
end load of 6%. What is the offering price?
Solution
Costs of investing
Costs of investing in Mutual funds (open end)
 Load fund – Load fee or front end load fee
 Back end fund – Back end fee or exit fee
 Operating expenses
 Marketing expenses (12b-1 fee in USA)
Costs of investing in Mutual funds (closed
end)
•Operating expenses, marketing expenses,
commission, DP fee, SEBON fee etc.
Mutual fund performance
 Holding period return :
(NAV 1 - NAV 0) + CG1 + D1
Rate of return =
NAV 0
 CG = Capital gain
 Expenses Ratio:
Operating expenses
Expenses Ratio =
NAV

 Portfolio Turnover Ratio:

Minimum of purchasing or selling of securities
Portfolio turnover ratio =
Average NAV
HPR calculation
Example
Example
Example
 Problem 1
An investor’s portfolio currently is worth Rs. 1
million. During the year, the investor sells 1,000
shares of Everest Limited at a price of Rs. 80 per
share and 2,000 shares of Makalu Limited at a price
of Rs. 40 per share. The proceeds are used to buy
1,500 shares of Annapurna Limited at Rs. 100 per
share.
a. What was the portfolio turnover rate?
b. What does it indicate?
c. High turnover ratio should reflect in superior
risk return performance. Comment.
 Ans:
a.15%
b. On average 15% of the portfolio is sold
and replaced with other securities each
year.
c. High turnover ratios are acceptable to
investors only if the portfolio manager has
skill in security selection or market timing.
 Problem 2
a. On January 1, the Pashupati Value Fund, an
investment company has a portfolio of assets worth
Rs. 102 million and liabilities of Rs. 2 million. If it
has 4 million shares outstanding on that date, what
is the Fund's NAV?
b. Suppose the Fund makes income and capital gain
distribution of, respectively, Rs. 2 and Rs. 3 per
share and ends the month with a net asset value of
Rs. 27, what is the monthly return?
c. Suppose, an investor paid Rs. 26 (Re. 1 being front-
end load) per share, what is the investor's return for
the month?
 Ans:
a. Rs. 25 per share
b. 28%
c. 23.07%
 Problem 3
Consider the three schemes of Nepalese
mutual funds. Scheme A, B and C. The
annual operating expenses of schemes are
Rs 20 million 25 million and 28 million
respectively. The total assets of each
schemes are Rs 1000 million; 1200 million
and 1500 million respectively. Which
scheme is best according to expense ratio?
 Ans:
Ans: 2.04%; 2.13% and 1.90%
 Problem 4
NMB Equity fund has issued 150,000 shares to investors. Currently, the
fund has accrued investment management fee obligations of Rs 40,000. The
fund’s portfolio is composed of seven stocks as shown below:
 Importance/advantages of mutual funds

• Affordability
• Professional management
• Diversification
• Convenience
• Low cost
• Liquidity
• Tax exemption
• Transparency
 Disadvantages of mutual funds
- Costs despite negative returns.
- Lack of control.
- Fluctuating returns
History of Mutual Funds
 NCM Mutual Fund 2050
 Issued by NIDC Capital Market in 1993/94
 Open end fund

 Citizen Unit Scheme, 2052

 Issued by Citizen Investment Trust
 Open end fund

 NCM Mutual Fund 2059

• Converted into close end with maturity of 10 yrs
• Traded at NEPSE
 Mutual funds in Nepal
Siddhartha Mutual fund Nabil Mutual Fund
NMB Mutual Fund NIBL Mutual Fund
Laxmi Mutual Fund Global IME Mutual Fund
Sanima Mutual Fund CBIL Mutual Fund
NIC-Asia Mutual Fund Sunrise Mutual Fund
Kumari Mutual Fund RBB Mutual Fund
Prabhu Mutual Fund Mega Mutual Fund
 Open end schemes
 NIBL Sahabhagita fund
 NIC Asia Dynamic debt fund
 Siddhartha Systematic investment scheme
 NMB Saral Bachat Fund – E
 Closed end schemes
Global IME Samunnat Scheme 1 (GIMES1)
Laxmi equity fund
NIBL Pragati Fund
NMB Hybrid Fund L-1
Nabil Equity Fund
Sanima Equity fund
Siddhartha equity fund
Citizen Mutual Fund 1
NIC Asia Growth Fund
Nabil Balanced Fund – 2
Citizens Mutual Fund – 2
NMB 50
Siddhartha Investment Growth Scheme 2
NIC Asia Balance fund
Sunrise first mutual fund
Laxmi Unnati Kosh
Sanima Large cap fund
Kumari Equity Fund
Sunrise Bluechip fund
Prabhu Select fund
NIBL Samriddhi Fund 2
NIC Asia Select 30
RBB Mutual Fund 1
Nabil Balanced Fund III
Mega Mutual Fund - 1
 Closed end funds matured
Siddhartha investment growth scheme -1
Laxmi value fund -1
NIBL Samriddhi Fund 1
NMB Sulav Investment Fund 1
Nabil Balanced fund 1
Siddhartha Equity Oriented Scheme
 Regulation and guidelines
1.Mutual fund regulation 2067
2.Mutual fund guidelines 2069
 Which fund is popular in Nepal and in Other countries ?

• Closed end fund

Or
• Open end fund
Note:

Mutual funds are subject to

market risk. Please read the
scheme related documents
carefully before investment.
 Thank You

?
Any questions?