Mutual Funds in Nepal

Security market, or financial market, can be defined as a mechanism for bringing together buyers and sellers
of financial assets in order to facilitate trading (Sharpe, Alexander & Bailey, p.47). It is recognized as an
effective way of raising capital for commercial enterprises, and at the same time providing an investment
opportunity for individuals and institutions. It provides mechanism to mobilize community savings for
productive investment. The security market is a requisite for the sound development of an economy because
it not only provides stable long-term capital for companies and an effective savings vehicle for the public,
but also functions as an efficient tool for resource allocation.
Nepal being one of the least developed countries in the world has to make every possible endeavour to
efficiently mobilize the available capital. The need for an efficient securities market is a must for the
efficient allocation of capital within economies. Mutual funds are simply a means of combining or pooling
the funds of a large group of investors (Corrado & Jordan, p.88). Since they provide indirect access to
financial markets for individuals, they are a form of financial intermediary. They represent a sensible and
efficient vehicle for individual investors to participate in the market (Fisher & Jordan, p.654). Investing in
mutual funds, the individual investor can in effect employ a team of investment professionals to manage his
money under the direction of a portfolio or fund manager. These individuals work full-time on studying the
markets, market trends, and individual stocks. Also, the fund allows the investor to purchase a much
diversified portfolio of securities for a small investment. It is impossible to purchase a much diversified
portfolio of individual securities with a modest investment outside of a mutual fund.
Thus, mutual funds could be an admirable institution for bridging the gap between the individual savers and
the established businesses in Nepal. It could be the medium to attract small Nepalese investors to help them
participate in the Nepalese securities market.
Concept of Mutual Fund
Basically, a company that pools funds obtained from individual investors and invests them in the securities
market is called an investment company. In other words, an investment company is a business that
specializes in managing financial assets for individual investors. All mutual funds are, in fact, investment
companies, however, not all investment companies are mutual funds (Corrado & Jordan, p.89).
There are two primary forms of investment companies: open-end and closed-end companies.
With an open-end fund, the fund itself will sell new shares to anyone wishing to buy and will redeem (i.e.,
buy back) shares from anyone wishing to sell. When an investor wishes to buy open-end fund shares, the
fund simply issues them and then invests the money received. When someone wishes to sell open-end fund
shares, the fund sells some of its assets and uses the cash to redeem the shares. As a result, with an open-end
fund, the number of shares outstanding fluctuates through time.

With a closed-end fund, the number of shares is fixed and never changes. If you want to buy shares, you
must buy them from another investor. Similarly, if you wish to sell shares that you own, you must sell them
to another investor.
Strictly speaking, the term mutual fund actually refers only to an open-end investment company.
Nonetheless, particularly in recent years, the term investment company has all but disappeared from
common use and investment companies are now generically called mutual funds (Ibid., p.90).
Back in our country Nepal, the history of mutual funds started with the flotation of NCM First mutual fund
2050 by NIDC Capital Markets in 1993 (Shrestha, et. al., p.203). Currently, there are two mutual fund
schemes: NCM Mutual fund 2059, managed by NIDC Capital Markets with NIDC as the trustee, and Citizen
Unit Scheme managed by Citizen Investment Trust.

Literature Review
Lenard et., al. (2003) empirically investigated investors attitudes toward mutual funds. The results indicate
that the decision to switch funds within a fund family is affected by investors attitude towards risk, current
asset allocation, investment losses, investment mix, capital base of the fund age, initial fund performance,
investment mix, fund and portfolio diversification. The study reported that these factors are crucial to be
considered before switching funds regardless of whether they invest in non-employer plans or in both
employer and non-employer plans.
Bollen (2006) studied the dynamics of investor fund flows in a sample of socially screened equity mutual
funds and compared the relation between annual fund flows & lagged performance in SR funds to the same
relation in a matched sample of conventional funds. The result revealed that the extra-financial SR attribute
serves to dampen the rate at which SR investors trade mutual funds. The study noted that the differences
between SR funds and their conventional counterparts are robust over time and persist as funds age. The
study found that the preferences of SR investors may be represented by conditional multiattribute utility
function (especially when SR funds deliver positive returns). The study remarked that mutual fund
companies can expect SR investors to be more loyal than investors in ordinary funds.
Walia and Kiran (2009) studied investors risk and return perception towards mutual funds. The study
examined investor's perception towards risk involved in mutual funds, return from mutual funds in
comparison to other financial avenues, transparency and disclosure practices. The study investigated
problems of investors encountered with due to unprofessional services of mutual funds. The study found that
majority of individual investors doesnt consider mutual funds as highly risky investment. In fact on a
ranking scale it is considered to be on higher side when compared with other financial avenues. The study
also reported that significant relationship of interdependence exists between income level of investors and
their perception for investment returns from mutual funds investment.
Saini et., al. (2011) analyzed investors behavior, investors opinion and perception relating to various issues
like type of mutual fund scheme, its objective, role of financial advisors / brokers, sources of information,
deficiencies in the provision of services, investors opinion relating to factors that attract them to invest in
mutual and challenges before the Indian mutual fund industry etc. The study found that investors seek for
liquidity, simplicity in offer documents, online trading, regular updates through SMS and stringent follow up
of provisions laid by AMFI.
Singh (2012) conducted an empirical study of Indian investors and observed that most of the respondents do
not have much awareness about the various function of mutual funds and they are bit confused regarding
investment in mutual funds. The study found that some demographic factors like gender, income and level of
education have their significant impact over the attitude towards mutual funds. On the contrary age and
occupation have not been found influencing the investors attitude. The study noticed that return potential

and liquidity have been perceived to be most lucrative benefits of investment in mutual funds and the same
are followed by flexibility, transparency and affordability.
According to Talluru(1997) the objective of mutual fund selection process is to choose a fund from large
number of available fund within the limits defined by investor preference, economic climate and constraints.
In this study researches argue that it is very complex procedure to select appropriate fund and majority of
investors lack awareness and expertizes. They developed a fuzzy system to select appropriate fund. This
fuzzy system of selection removes vagueness in selection process and novel way of mutual funds selection
(Talluru, 1997).

Dependent Variables

Independent Variables

Safety
Liquidity
Reliability
High Returns
Tax Benefits

1. Intrinsic Fund
Qualities
2. Credibility of

1. Fund Related Qualities

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3. Flexible
Investment
Facilities

4. Reputation
5. Competent
Performance

6. Transparent
Disclosure
7. Tangible/Fringe
Benefits
8.

2. Fund Sponsor Qualities

3.Investor Related Services