Open-end mutual funds (SIP) have become an important investment option in Nepal, especially for people who want flexibility while managing risk. Although the concept looks simple from the outside, many investors still do not fully understand how these funds are structured, how units are bought or sold, and what rules govern them. This overview explains the essential features of open-end mutual funds in a clear and practical way.
What an Open-End Mutual Fund Is
An open-end mutual fund is a collective investment plan where money is gathered from many investors and managed by a professional fund manager. The fund invests this pool of money in shares, debentures, fixed-income instruments, and other approved securities.
Unlike company shares, investors in a mutual fund purchase units of the fund. The value of these units is based on the fund’s Net Asset Value (NAV), which changes according to market performance and portfolio returns.
The basic purpose of any fund is to combine small investments, manage them efficiently, and generate returns through expert decisions—turning limited individual resources into a more productive pooled investment.
Legal Definition and Structure
Nepal’s securities laws define a mutual fund as a scheme operated by a fund manager on behalf of participants, with the goal of investing pooled money and distributing returns proportionally.
A fund can be of two types based on structure:
Open-End Fund (खुलामुखी फन्ड): Units are continuously issued and redeemed.
Closed-End Fund (बन्दमुखी फन्ड): Units are issued only once and traded on the stock exchange.
Open-end funds fall under the category of collective investment schemes, where multiple participants invest together and share returns.
What Makes an Open-End Fund Different
Open-end mutual funds operate differently from closed-end funds in several important ways:
1. Continuous Unit Issuance
Open-end funds issue new units at any time. There is no fixed sales period.
2. No Fixed Duration
These funds do not have a maturity period. They continue operating until the fund manager or regulator decides otherwise under specific legal conditions.
3. No Stock Exchange Listing
Open-end units are not listed on NEPSE. Instead, they are purchased and redeemed directly through the fund manager or an approved distributor.
4. Price Based on NAV
The buying and selling price is determined strictly by the fund’s NAV.
The selling price (price to investors) cannot be more than 110% of NAV.
The repurchase price (price the fund pays when buying back units) cannot be less than 90% of NAV.
5. Daily NAV Calculation
Open-end funds calculate NAV daily after the market closes.
Closed-end funds usually calculate NAV weekly or monthly.
6. Liquidity Provided by the Fund Itself
Investors do not need a broker to sell their units.
The fund manager directly redeems units at NAV, making liquidity easier and more reliable.
How Buying and Selling Works
Buying or selling units of an open-end fund is a straightforward process:
Investors submit a purchase request through the fund’s designated distributor or service center.
The fund manager must confirm acceptance or rejection of the request within seven days.
Once accepted, units must be issued within 15 days.
If a request is rejected, the refund process must begin within three days.
Units are bought at the published NAV of the previous working day, and the fund manager must publish updated prices regularly.
Key Differences Between Open-End and Closed-End Funds
| Basis of Difference | Open-End Mutual Fund (खुलामुखी फन्ड) | Closed-End Mutual Fund (बन्दमुखी फन्ड) |
|---|---|---|
| Unit Issuance | Units are issued continuously; investors can buy anytime. | Units are issued only once during the NFO period. |
| Buying Period | Can be purchased on any business day throughout the year. | Can be purchased only during the NFO subscription period. |
| Duration / Maturity | No fixed maturity date; operates indefinitely. | Fixed maturity period (usually 5, 7, or 10 years). |
| How Liquidity Works | The fund manager provides liquidity by buying back units directly. | Liquidity is available through NEPSE by selling units to other investors. |
| Listing on NEPSE | Not listed on the stock exchange. | Listed on NEPSE after NFO. |
| Price Determination | Price is based on daily Net Asset Value (NAV). | Price is decided by market demand and supply; may be at premium or discount to NAV. |
| Buying/Selling Price Rules | Buying price ≤ 110% of NAV; Selling price ≥ 90% of NAV. | No fixed rule; prices fluctuate freely in the market. |
| Need for Broker | No broker required; transactions handled by the fund manager or distributor. | Broker or TMS account required for trading units. |
| NAV Calculation Frequency | Calculated daily after market close. | Calculated weekly or monthly, depending on the fund. |
| Mode of Investment Certificate | Units are issued electronically (dematerialized). | Units are also electronic, similar to shares and other funds. |
| Liquidity Source | Liquidity depends on manager’s buyback availability. | Liquidity depends on market activity and buyers on NEPSE. |
These differences help investors choose the fund type that matches their goals and liquidity needs.
Frequently Asked Questions about Open-End Mutual Funds in Nepal
How do open-end mutual funds work in Nepal?
Open-end mutual funds work by issuing and redeeming units directly based on daily NAV. Investors buy or sell through the fund manager, and units are created or canceled with each transaction, ensuring continuous liquidity.
How can investors buy or sell open-end mutual fund units in Nepal?
Investors buy or sell units by submitting a request to the fund manager or distributor. Units are issued at the previous day’s NAV, and accepted requests must be completed within the regulator’s timeline.
Are open-end mutual fund prices always based on NAV?
Yes, open-end mutual fund prices are strictly based on NAV. Buying cannot exceed 110% of NAV, and selling cannot fall below 90% of NAV, ensuring fair pricing for all investors.
Do open-end mutual funds in Nepal require a broker for selling units?
No, open-end mutual funds do not require a broker. Units are redeemed directly through the fund manager, unlike closed-end funds that trade on NEPSE through brokers.
What is the main difference between open-end and closed-end mutual funds in Nepal?
The main difference is that open-end funds offer continuous buy/sell at NAV, while closed-end funds trade on NEPSE like shares. Closed-end prices depend on market demand, not NAV.