Mutual Fund in Nepal , the Intitiation of NCML Mutual Fund
The target of any securities market , debt or equity securities, is to arrange mainly locally available financial means for investments in long-term oriented projects in a country, which have difficulties to be financed within the banking system. They may be either in the private sector (like hotels, hydropower, educational institutions, air transport or other) or in the government sector (eg mainly development expenses like infrastructure). These only in the long term cash recovering projects have often difficulties to get financed as very few investors are ready to see their money bound for a too long period. Thus the importance of a functioning security market lies in the fact, that it makes long term investments short term liquidable.
The idea to go for a securities market in Nepal came exactly from this corner as money as such is not a problem in Nepal, but capital means long term investment resources are..
So NIDC Capital Market was created to be a facilitator of the securities market and was indeed the main driving force for the establishment of the same.
The first Mutual Fund in this country was created after the starting of the first stock exchange in this country end 1993. The main reason for the establishment of the first Mutual Fund by NIDC Capital Market was, that no stock market in the world can flourish without institutional players.
Institutional players are necessary to bring securities investment to a broad segment of society.
Having none at that time, it was essential to create one if the creation of a stock exchange should make sense at all in the medium run.

Amount of NCML mutual fund
The Mutual Fund was founded as a timewise and capitalwise open fund, as nobody could give any hint how much the market was ready to invest. Thus the first primary collection arranged NPR 30mio, but as the equity securities market started to show positive results with stock prices rising more money flowed in and the peak the Fund had a portfolio of NPR 100mio..

Reason for the limited success of NCML Mutual Fund
While the fund still exists today and has an inner value of NPR 15 per unit the fund did not reach its targets. What had been the targets?

Target one
was the creation of institutional players active in the market. Although Provident Fund could have become an institutional player it never became active. Citizen investment trust created to become a daily player as well was in the beginning not participating at all. It became instead a long term investor, putting its money purely in IPO’s where CIT was always the loved baby getting help from every official side, while NCML Mutual Fund was designated as the bad boy, to whom one even cut the volume of IPO’s subscriptions.
The other player created at that time was Sharemarket Ltd, which played indeed the speculator game. Very important for an advanced stock market, but killing in its infancy.
Target one partly successful

Target two
was creating awareness of good management handling your portfolio if you are ready to invest.
With the fund open to refund any time the investment in the fund became attractive, shown in the development after the first issue, when the fund could collect quite some money (in the context of a very early stockmarket in Nepal) The management of the fund invested in companies where the valuations were low and the potential in principal high.
But with the fund showing some success, forces which lost their good earning from private trading of the time before the stock market was created became active (the incumbents) and as any incumbent threatened by a newcomer is fighting for survival, they started to do exactly this.

How?

1) Starting to play volatility in the market, targeting companies which were in the portfolio of the Fund. This portfolio was transparent on daily basis and that made the fund vulnerable.

2) Making investors in private talks insecure and encouraging them to liquidate their investments in the fund

3) Making it nearly impossible for NCML Mutual Fund to invest in IPO’s by limiting the possible investment to the utmost

4) Creating in the market a hysteria that the management of the Fund made money on their own at the cost of the investors (not a fact, but a good point to attack, if people were ready to believe that everybody in this country is a crook) .

5) Putting one investigation after another to NIDC Capital Market, which didn’t help the management of the fund, but which every time ended without negative results.

6) When this didn’t help starting to refer to hefty personal attacks not hesitating to take any step to discredit the top management of NIDC Capital Market and making it impossible to take needed decisions.

7) After this the hefty outflow was unavoidable. Still even then the necessary liquidity wasn’t a problem at all, even in the narrow stock market, as some parts of the portfolio were in hefty demand. Nepal Bank portfolio disposal alone would have solved the whole run on the fund as at that time quite a few big houses in Nepal were interested in the acquisition of the same at a very high profit for NCML MF. But the game of the incumbents was to avoid that and so no decision could be made. Let’s not go in more details but the game was bloody ugly.

8) After this the Central Bank was called to the rescue. Financially it did, but handing over the handling of the Mutual Fund portfolio to an absolute incompetent trustee wasn’t helping

9) Another investor unfriendly measure was the change of a daily refundable Paper into a listed paper. Agreed that was necessary, but trading without any market making was killing the fund.

Thus it is more than astonishing that the fund survived and has nowadays an inner value of NPR 15. Make your own mind.
It’s not a success story, but sometimes its even a wonder if something, shot at from all possible corners, still survives.

Scope of mutual fund in nepalese market
Money is not a huge problem in Nepal’s environment. Even though a lot of money has already fled the country and total remittances are increasingly said to slow down, the Mutual Fund Industry in this country could pi
ck up under certain circumstances..

How?

First
Allowing more existing institutional players and new ones to enter the securities market
and allowing the banks and the financial institutions to invest unlimited in the securities market.

Second
a MF should be easily tradable or refundable.
Shares are in the existing market difficult to trade. If the market goes up it gets more difficult to buy as nobody wants to sell. If the market goes down nobody is interested to buy. This contributes to low market liquidity It is one of the reasons besides abominable company governance that only banking shares are traded to a certain extend. All other papers are more or less dead trousers, even if insurance companies are in this country good money spinners.
A MF, which can guarantee, that the investor gets his investment back, when he desires so, could make it an interesting vehicle.

Third
a MF should be treated with priorities in IPO’s
Sounds funny, as in few countries share prices of companies without profits are going up, if there is no speculation behind.
But in Nepal reasonable IPO’s in non financial or insurance sector have little successes. So the market stays married to one sort of companies, which isn’t healthy at all. If reasonable companies are coming to market money can be made even with shares in an early stage, For this a deeper analysis of the promoters and their success in other projects and an economic sector analysis are needed, For a fund with a good management nothing new.

Priorities in IPO treatments are a must

Fourth
debt securities have to be introduced in a bigger extend
Seems possible if one follows the talk of officials, but mind you talk is not action. Still seeing the glimpses of debt securities development in this country it could become interesting. Why?
Up to now debt securities from banks are the only one’s allowed.
If a MF gets the right of placements for industry, trade and services then the fund could play a very active role.
Risk it’s not a standard business for Mutual Funds

Fifth
Volume of MF has to be reasonable to secure management fees
Good management of a Mutual Fund is not cheap. This means, if the fees should be acceptable to the market you need big volume. If the government allows a very sizable amount to be placed combined with special privileges, one of them to invest also abroad, reaching the needed volume could be possible. Nearly everyone right now is interested to put at least some money outside. On the other hand if the government would allow such foreign investments it could be read as a sign that the government believes in the future of this country, which could have to some extend even a reverse effect, at least after a certain acclimatization period.
This investment should stay within the SAARC region as the SAARC cooperation is one pillar of economic policy in this country. But seeing the initial reactions of bureaucrats this will be a very big hurdle to overcome.

Views on banks introducing mutual fund in Nepal

Banks with international ties can do the job if their mother companies have a record of Mutual Fund business. This excludes all banks which don’t have and that is the big majority nowadays.
The Banks in this country, who fit into the picture, are basically Everest Bank, with Indian connections, Standard Charter, with European connections, and Nepal Investment Bank, with no international connection but to some extend in house experience if one includes its affiliates.