Chapter I: Background .....................................................................................................................

1
Introduction: ................................................................................................................................ 1
Origins of mutual funds: .............................................................................................................. 1
Chapter II: Mutual Fund Structure ................................................................................................... 3
Open – versus closed –end funds: ............................................................................................... 3
Advantage of open –end mutual fund: ........................................................................................ 3
Net asset value:............................................................................................................................ 3
Difference between Closed-end Funds versus Open-end funds: ................................................ 4
Advantage of mutual fund: .......................................................................................................... 4
Professional management ....................................................................................................... 4
Diversification: ......................................................................................................................... 4
Economies of scale:.................................................................................................................. 4
Liquidity:................................................................................................................................... 4
Simplicity: ................................................................................................................................. 4
Disadvantage of mutual fund: ..................................................................................................... 5
Costs despite negative returns: ............................................................................................... 5
Lack of control:......................................................................................................................... 5
Fluctuating returns:.................................................................................................................. 5
Major types of mutual funds: ...................................................................................................... 5
Money market funds:............................................................................................................... 5
Stock funds:.............................................................................................................................. 5
Bond fund:................................................................................................................................ 5
Income funds: .......................................................................................................................... 5
Cost of investing in mutual funds: ............................................................................................... 5
Load fund: ................................................................................................................................ 6
Back-end load: ......................................................................................................................... 6
Operating expenses: ................................................................................................................ 6
12B-1 fee: ................................................................................................................................. 6
Chapter III: Historical Development of Mutual Fund ....................................................................... 7
Chapter V: Mutual Fund in Nepal .................................................................................................... 8
NCM Mutual Fund, 2050:............................................................................................................. 8
Citizen Unit Scheme, 2052: .......................................................................................................... 8
 Structure of Mutual Fund in Nepal: ............................................................................................. 8
Fund sponsor: .......................................................................................................................... 9
Fund manager: fund manager is the company having at least 51% ownership of the fund
sponsor. Siddhartha capital is the fund manager of Siddhartha mutual fund. ....................... 9
Depository:............................................................................................................................... 9
Fund supervisor........................................................................................................................ 9
Current situations of mutual fund in Nepal: .............................................................................. 10
Chapter VI: Regulation of Mutual Funds: ...................................................................................... 11
 Chapter I:
Background

Introduction:
Small investors who purchase securities individually are often unable to diversify
because of their limited investment. Mutual funds offer a way for these investors to
diversify. Some mutual funds contain 100 or more securities, and the minimum
investments typically range from $250 to$2500. In case of Nepal, the minimum
investment is Rs 1000. Small investor could not afford to create such a diversified
portfolio on their own. Moreover, the mutual fund uses experienced portfolio managers,
so investor do not have to manage the portfolio themselves.

Mutual funds are like depository institutions in that they repackage the proceeds received
from individuals to make various types of investments. An investment in mutual funds is
distinctly different from depositing money in a depository institution in that it represents
partial ownership, whereas deposit represents a form of credit. Thus, the investors share
the gains or losses generated by the mutual fund, while depositors simply receive the
interest on their deposits.

Mutual fund must adhere to a variety of federal regulations. They must register with the
Securities and Exchange Commission (SEC) and provide a prospectus to interested
investors that disclose details about the components of the fund and the risk involved.
Mutual funds are also regulated by state laws. It must disclose their performance record.
If a mutual fund distributes at least 90 % of its taxable income to shareholders, it is
exempt from taxes on dividends, interest, and capital gains distributed to shareholders. In
case of Nepal, SEBON is the regulator of the mutual funds under mutual fund Regulation
2067.

Origins of mutual funds:

The origins of mutual funds can be traced back to the mid to late 1800s in England and
Scotland. Investment companies were formed that pooled the funds investors with modest
resources and used the money to invest in a number of different securities. These
investment companies became more popular when they begin investing in the economic
growth of the United States, mostly by purchasing American railroad bonds.

The first fund in which new shares were issued as new money was invested the dominant
structure seen today- was introduced in Boston in 1824. This fund allowed for continuous
offering of shares, the ability to cash out of the fund at any time, and a set of restrictions
on investments aimed at protecting investors from losses.

1
The stock market crash of 1929 set mutual fund growth back for several decades because
small investors distrusted stock investment generally and mutual funds in particular. The
investment company Act of 1940, which required much more disclosure of fees and
investment policies, reinvigorated the industry try, and mutual funds began a steady
growth.
 Chapter II:
Mutual Fund Structure

Mutual fund companies frequently offer a number of separate mutual funds. They are
called complexes and are defined as a group of funds under substantially common
management, composed of one or more families of funds. The advantage to investors of
fund complexes is that investments can usually be transferred among different funds
within a family very easily and quickly. Mutual funds can be structured in two ways that
is open-end and closed end funds.

Open – versus closed –end funds:

Mutual funds are structured in two ways. The first funds were what are now called
closed-end funds. In a closed end fund, a fixed number of non redeemable share are sold
at an initial offering and are then traded in the over the counter market and organized
stock exchange like common stock. The market value of the shares fluctuates with the
value of the assets held by the funds.

The problem with closed- end funds is that once shares have been sold, the fund cannot
take in any more investment rupees. The advantage of closed- end funds to managers is
that investors cannot make withdrawals.

Nowadays, the closed end fund has been largely replaced with the open-end funds.
Investor can contribute to an open end fund at any time. The fund simply increases the
number of share outstanding. Another features of open- end funds is that fund agrees to
buy back share from investors at any time. Each day the fund Net asset value is computed
based on the number of shares outstanding and the net assets of the fund.

Advantage of open –end mutual fund:

 The fund agrees to redeem share at anytime, the investment is very liquid.
 The open – end structure allows mutual funds to grow unchecked. As long as
investments want to put money in the fund it can expand to accommodate them.

Net asset value:

The net asset value of the mutual funds indicates the value per share. It is estimated each
day by first determining the market value of all securities comprising the mutual fund.
Any interest or dividends accrued from the mutual fund are added to the market value.
Then any expenses are subtracted, and the amount is then divided by the number of
shares of the fund outstanding.

NAV = (Market value of assets – liabilities)/number of share outstanding.

Difference between Closed-end Funds versus Open-end funds:
Open end funds
Has no maturity period
Are not listed on stock exchange
Fund issues new shares to investors.
They do not have a fixed capitalization
Shares are redeemable.
Shares trade at net asset value.
Buy/sell transaction occurs between fund
and investor.
Closed end fund
Has a fixed maturity period
Are listed on stock exchange
Fund establishes set number of shares and
does not issue new shares.
They have limited capitalization.
Shares are not redeemable
Share trade at market prices.
Buy/sell transaction occurs among
shareholders on an exchange.

Advantage of mutual fund:

Professional management:

The primary advantage of mutual funds is the professional management of the investors
money.

Diversification:
By owning shares in a mutual fund instead of owning individual stocks or bonds,
investment risk is spread out.

Economies of scale:
Because of mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual, would pay for securities transactions.

Liquidity:
A mutual fund provides liquidity that is like shares, it can be converted in to cash at any
time.

Simplicity:
Buying a mutual fund is easy and the minimum investment is small. In Nepal minimum
investment amount is just Rs. 1000.
Disadvantage of mutual fund:
Costs despite negative returns:
Investment must pay sales charges, annual fees, and other expenses regardness of how
the fund performs.

Lack of control:
Investors typically cannot ascertain the exact make up of a funds portfolio at any given
time, nor can they directly influence which securities the fund manager buys and sells or
timing of those trades.

Fluctuating returns:
Mutual funds are like many other investments without a guaranteed return. There is
always the possibility that the value of mutual fund will depreciate.

Major types of mutual funds:

There are many types of mutual funds, some are discussed below:

Money market funds:

Money market funds relatively low risk, compared to others mutual funds. By law, they
are limited to investing only in specific high quality, short term investments issued by
government.

Stock funds:
Stock funds, also called equity funds, are the most volatile than others mutual funds.
Value sometimes rising and falling sharply over a short period.

Bond fund:
The type of bond funds include government income funds that buy government and
government agency securities, corporate bond funds and bond issued by foreign company
and governments.

Income funds:
Income fund is a type of mutual fund that emphasizes current income, either on a
monthly or quarterly basis as opposed to capital appreciation.

Cost of investing in mutual funds:

Investors incur several costs when they use mutual funds:
Load fund:
Commissions paid at the time of a fund purchased.

Back-end load:
Commission paid when a fund is sold. Typically, funds that charge back end loads start
them at 5% to 6% and reduce them by 1% point for every year the fund are left invested.

Operating expenses:
Operating expenses is the costs incurred by the mutual fund in operating the portfolio,
including administrative expenses and advisory fees paid to the investment manager.

12B-1 fee:
An annual marketing or distribution fee on a mutual fund. It is limited to 1 % f a funds
average net asset per year. The fee gets its name from a section in investment company
act of 1940 in USA.
 Chapter III:
Historical Development of Mutual Fund

The first modern investment company, the Scottish-American investment Company, was
founded in London in 1860 at the beginning of a stock market boom that lasted until
1875. By then, there were fifty investment companies in Britain. Many of them failed in
the stock market crisis of 1890, and public interest in the stock market won until it was
renewed by the boom of the 1920s.

It was during the same boom of the 1920s that investment companies first became
important in the united states. They had existed since the 1980s, but, by 1923, there were
only fifteen with total assets of no more than $15 million. However, as stock prices
soared in the late 1920s, and small investors rushed to get in on the action mutual fund
mushroomed. By 1929, there were some 400 with $3 billion in assets. Most of the early
mutual fund were closed- end companies.

The stock market collapse between 1929 and 1933 was, of course, a catastrophe for the
investment companies. Poor management and risky investment practices that had gone
unnoticed in the boom became painfully apparent in the collapse.

He 1930s saw a relatively rapid growth of open ended companies(mutual fund), partely
because of the disrepute into which the closed end companies had fallen. In particular,
open ended companies were not allowed to issue debt. The first mutual fund, the
Massachusetts investors Trust, had been formed in Boston in 1924.

In india, Unit Trust of india was established as a trust by the government of india in
februry 1964 in terms of UTI Act, 1963.it provides attractive investment opportunities
through issue of units and shares under various schemes. Till the middle of 1986, there
was only one mutual fund, namely UTI,operating in india.
 Chapter V:
Mutual Fund in Nepal

In Nepal, NCM mutual fund 2050 was established by NIDC capital market as the first
mutual fund in 1993/94. It floated units of Rs 10 par value in the beginning. The fund
was of an open end type. The fund performed well in the beginning, when there was the
boom in the stock market. Its performance deteriorated in 1995 and ts trading had to be
suspended due to excessive selling pressure. The fund was restructure in to closed end
fund to bring it back into operation in the name of “NMC Mutual fund, 2059” on August
9, 2002.

Similarly, citizen Unit Scheme (CUS) was operated by citizen investment trust (CIT) as a
second collective investment scheme in 1994/95. It was incorporated under the citizen
investment trust act, 1990. It was established as an open ended scheme with the face
value of Rs 100 per unit.

NCM Mutual Fund, 2050:

In Nepal the practice of mutual fund started on Ashad 19, 2050 BS (1993). Initially it was
issued as an opn ended fund but after financial problem, it is converted into closed end
fund. NCM first Mutual fund, 2050 was started with the objectives of providing expert
investment services with par value of Rs. 10 per unit was issued in multiple of 100 by
NIDC capital markets in the year 1993.

Citizen Unit Scheme, 2052:

Citizen Unit scheme, 2052 with a par value of rs 100 came into operation in the year
1995. CIT has been managing this scheme. The scheme is in operation on income cum
growth concept. It is open end scheme and provides regular income in the form of
dividend to the unit holders.

Structure of Mutual Fund in Nepal:

There may be different organizational structures of mutual funds in different countries. In
case of Nepal, mutual fund regulation, 2067 has conceptualized the structure of mutual
fund with Sponsor, fund Supervisor, Fund Manager and Depository. The following
picture can bring clarity about the mutual fund structure in Nepal:
 Fund sponor Fund manager
(siddhartha Bank ltd.) (siddhartha capital Ltd)

Mutual fund
(Siddhartha
mutual fund)

Depository
Fund supervisor
(Siddhartha capital Ltd)

Fund sponsor:
A commercial bank which has obtained “A” class license to operate banking business in
Nepal from Nepal rastra bank (NRB) can be the sponsor of mutual fund.

Fund manager:
fund manager is the company having at least 51% ownership of the fund sponsor.
Siddhartha capital is the fund manager of Siddhartha mutual fund.

Depository:
Depository is the institution established for the purpose of safekeeping of assets, keeping
records of the unit holders of the scheme, transforming ownership, distributing dividends
of the scheme etc.

Fund supervisor
A group of minimum five different reputed professionals having 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 sector
and fulfill other requirements as per the mutual fund regulation are fund supervisors.
Current situations of mutual fund in Nepal:
After the issuance of mutual fund regulation, 2010 by SEBON, “A” class commercial
banks started registering mutual funds. Siddhartha mutual fund is the fund registered by
Siddhartha bank limited with SEBON, which is the first mutual fund as per the
regulation.
 Chapter VI:
Regulation of Mutual Funds:

Mutual funds are regulated under four federal laws designed to protect investors. The
securities act of 1933 mandates that funds make certain disclosures. The securities
exchange act of 1934 set out antifraud rules covering the purchase and sales of fund
shares. The investment company act 1940 requires all funds to register with the SEC and
meet certain operating standard.

In Nepal, mutual funds are regulated by security board of Nepal (SEBON).