Mutual funds are a way for people and institutions to join the share market without buying shares directly from the secondary market. They work by collecting money from many investors and investing it in a mixed portfolio of shares, bonds, and other securities. This helps investors get professional management and diversification through one investment product.
How Mutual Funds Operate in Nepal’s Share Market
1) Money is pooled from many investors
A mutual fund starts by collecting money from a large number of investors. Many investors may not have enough time, skills, or capital to manage investments on their own. When everyone’s money is combined, the fund becomes big enough to invest in more opportunities that small investors may not be able to access alone.
2) A professional fund manager runs the investments
After collecting money, the mutual fund is managed by professionals. The fund manager studies the market, checks company financial conditions, looks at market patterns, and then decides where to invest. The goal is to aim for returns while also managing risk based on the fund’s direction.
3) The fund invests in shares and other securities
The fund manager uses the pooled money to invest in different types of securities, such as:
Common stocks (equities) through NEPSE
Fixed income or debt instruments
Government securities and other securities
This approach helps the fund spread investments across multiple areas instead of relying on one place.
4) NAV shows the value per unit
NAV (Net Asset Value) is the value of one unit of a mutual fund. In open-ended mutual funds, NAV is calculated daily based on:
The total value of fund assets
The debts or liabilities of the fund
The number of units in circulation
If the value of the fund’s assets goes up, NAV increases. If asset value falls, NAV decreases. This helps investors track their investment value regularly.
5) Investors buy and sell units based on the fund type
How you buy or sell mutual fund units depends on whether the fund is open-ended or closed-ended:
Open-ended funds: You can purchase or sell units directly through the fund manager. These are not listed on NEPSE.
Closed-ended funds: Units are first available during the subscription period (NFO) and later traded on NEPSE. After listing, investors buy and sell units through the secondary market.
Why Mutual Funds Matter in the Share Market
Mutual funds don’t only help investors. They also support the share market as a whole.
Market liquidity
Mutual funds regularly buy and sell securities, which increases activity in the market. This helps keep the market active and makes it easier to trade without creating extreme price changes.
Diversification and risk management
Mutual funds invest across many securities and sectors. If one company performs poorly, other holdings may perform better. This spreads risk compared to putting all money into one investment.
Access to a wider range of securities
Through mutual funds, investors can reach shares, bonds, and other securities that may be difficult or expensive for a small investor to buy alone. Pooling money makes these investments more possible.
Contribution to market growth
By investing in different securities, mutual funds support capital flow into the market. They also attract new investors who may not feel confident investing directly, which can increase market participation and turnover.
How to Invest in Mutual Funds in Nepal’s Share Market
1) Buy units during a New Fund Offer (NFO)
For closed-ended mutual funds, units are offered during the NFO at face value and later listed on NEPSE.
For open-ended mutual funds, units are available continuously through the fund manager (through an online platform or by visiting the office).
2) Trade closed-ended fund units on NEPSE
Once closed-ended fund units are listed on NEPSE, they can be traded like other exchange-traded securities. The trading price can be higher or lower than NAV because the market price is affected by supply and demand. Orders are placed through registered stock brokers during market hours.
3) Use online platforms or stockbrokers
Open-ended funds: Units can be purchased directly using online investment platforms provided for open-ended schemes.
Closed-ended funds: Units are purchased or sold through licensed stock brokers after the fund is listed.
FAQs
1) Can I invest in mutual funds without buying shares directly?
Yes. Mutual funds are designed to let you join the share market without directly buying equities from the secondary market.
2) What is NAV in a mutual fund?
NAV is the value per unit of a mutual fund. In open-ended funds, it is calculated daily using the fund’s total assets, liabilities, and units in circulation.
3) Where do mutual funds invest in Nepal?
Mutual funds can invest in shares through NEPSE, fixed-income or debt instruments, government securities, and other securities.
4) How do I buy open-ended mutual fund units?
You can buy or sell open-ended mutual fund units directly through the fund manager, either online or by visiting the fund manager’s office.
5) Why can closed-ended fund prices on NEPSE be different from NAV?
Because after listing, closed-ended fund units trade in the market. The price is decided by supply and demand, so it may be more or less than NAV.