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A 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). In other words

security market is a component of the wider financial market where

securities can be bought and sold between subjects of the economy, on

the basis of demand and supply. Mutual fund is considered as an

effective way of raising capital not only for commercial enterprises but

also giving an opportunity for investment to each and every individuals

and institutions. A mutual fund is a type of professionally managed

collective investment scheme that pools money from many investors to

purchase securities. While there is no legal definition of the term

mutual fund. It is most commonly applied only to those collective

investment vehicles that are regulated and sold to the general public.

(www.wikipedia.org) It provides opportunity for mobilizing 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, one of the least developed countries in the world has to make

different strategies and plans for collecting and mobilizing efficiently the

available capital in the country. For the efficient securities market

efficient allocation of capital is essential for the well-functioning of the

economies. The need for an efficient securities market is a must for the

efficient allocation of capital within economies. Mass participation in

countrys industrialization process is possible only through the efficient

mechanism of securities market as it promotes efficient collection ofsmall and scattered savings from the investors and provides returns to

them in the form dividend (Adhikari, p.41). The financial intermediaries

that link savings with the users of capital would be needed to make the

mass participation possible and the securities market work more

efficiently. These intermediaries are well acquainted of every aspect

http://www.wikipedia.org/http://www.wikipedia.org/

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related to the investment and of opportunities of employing funds

profitably. They can go farther afield geographically; they know the

personal reputation of would-be borrowers; they command expert advice

of the highest quality. In this manner they can secure a higher return on

the savings of individuals owing to superior knowledge and bargaining

power (Grant, A.T.K., p.183).

Mutual funds come right there. Mutual funds are simply a means of

combining or pooling the funds of a large group of investors (Corrado &

Jordan, p.88). The mutual fund having indirect assess to financial

markets for individuals can be considered a financial intermediary. They

represent a sensible and efficient vehicle for individual investors to

participate in the market (Fisher & Jordan, p.654). 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.

1.2 Concept of Mutual Fund

A company that manages the funds collected from the individual

investors and by investing it in other security markets is 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 andclosed-end companies.

The fund itself will sell new shares to anyone wishing to buy and will

redeem shares from anyone wishing to sell in the open-ended mutual

fund. The fund simply issues open ended fund shares and then invests

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the money received while buying the shares. The fund sells some of its

assets and uses the cash to redeem the shares while selling the open-

ended 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

so in order to buy shares, one must buy them from another investor.

Similarly, to sell the shares, one 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).

Mutual Fund History:

The mutual fund industry in Nepal started about 15 years ago with the

introduction of NIDC Capital markets which issued an open ended

mutual fund, NCM Mutual funds, for Rs. 10 per unit in 1991/92. Withthe view of participation of small savers only in capital market cannot

handle the intricacies of the stock market, the NCM First Mutual Fund

2050 was issued with the objectives to involve institutional players in

the development of stock market and give stability to it. Its purpose was

largely to stabilize the market and increase confidence in the financial

markets. (KC & Pandey, July 2009).

The buyers could buy maximum of Rs.100 million of the fund with face

value of Rs.10 per unit and 100 units as minimum number purchased.

The funds so collected were invested in equity, debentures, bonds and

short-term tradable securities with 90 per cent of the amount collected to

be invested in bonds, debentures and shares at maximum and the

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investment in the short-term securities were limited to 30 per cent at

maximum but not less that 10 per cent.

The investment criteria were:

1. The fund of this scheme would be invested in financially soundcompanies in general listed or to be listed.

2. Fund should not be invested in risky business3. The fund looked for good returns from capital gain, dividend and

interest

4. Investment would be done in existing companies or newlyprivatized public entities

5. Specific investment areas of the funds would be banking andfinancial institution, tourism, trading, construction areas, services

and in manufacturing

6. The funds involved in one company shall not be more than 10-%of the total size of the fund

Current scenario:

Currently two mutual fund investment exists in the security market of

Nepal : Sidhartha mutual fund & Nabil growth fund

Siddhartha mutual fund: After the mutual fund regulation was enacted

by the SEBON in Nepal, in 2010, Siddhartha mutual fund came int

existence. It is a closed ended fund and according to the mutual fund act

it has structured itself with the Fund sponsor, Fund supervisor, Fund

Manager and depository. Currently, Siddhartha bank is the fund sponsor,Siddhartha capital with 51% ownership of siddhartha bank and

Depository is the institution established for the purpose of safekeeping

of assets, keeping records of the unit holders of the scheme, transferring

ownership, distributing dividends of the scheme etc. As per mutual fund

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regulation fund manager can act as depository so siddhartha capital

limited acts as the depository of Siddhartha mutual fund.

Siddhartha capital is a growth fund. The aim of growth funds is to

provide capital appreciation over the medium to long- term. Suchschemes normally invest a major part of their corpus in equities. Such

funds have comparatively high risks. These schemes provide different

options to the investors like dividend option, capital appreciation, etc.

and the investors may choose an option depending on their preferences.

The mutual funds also allow the investors to change the options at a later

date. Growth schemes are good for investors having a long-term outlook

seeking appreciation over a period of time.

Nabil balanced fund: The Nabil balanced fund with NFO price per unit

of rs 10 with total amount of 60,000,000 units was issued in the scheme

named Nabil balance fund-I. Investors must hold at least 100 units but

not more than 6,000,000 Units which has 5 years of maturity. The Nabil

mutual fund has Nabil bank as the fund sponsor and Nabil Investment

Banking Ltd. (Nabil Invest), a subsidiary of Nabil Bank has obtained

licenses of Fund Manager & Depository in a mutual fund from SEBON

and will be rendering the said services to the schemes of Nabil Mutual

Fund.

Nabil mutual fund is a balanced fund. The aim of balanced funds is to

provide both growth and regular income. These schemes invest in both

equities and fixed income securities in the proportion indicated in their

offer documents. These are appropriate for investors looking for

moderate growth. They generally invest 40-60% in equity and rest in

debt instruments. These funds are also affected because of fluctuations

in share prices in the stock markets and interest rates. However, NAVsof such funds are likely to be less volatile compared to pure equity

funds.

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References:

www.nabilinvest.com.np/doc/downloads/130315135523_NABIL%20BALANCED%20FUND%20I.pdf

http://www.siddharthacapital.com/index.php/mutual-fund-basics

http://nepalistock.blogspot.com/2007_08_01_archive.html

http://janroman.dhis.org/finance/Books%20Notes%20Thesises%20etc/LSE/Chap04.pdf

http://www.siddharthacapital.com/index.php/mutual-fund-basicshttp://www.siddharthacapital.com/index.php/mutual-fund-basicshttp://nepalistock.blogspot.com/2007_08_01_archive.htmlhttp://nepalistock.blogspot.com/2007_08_01_archive.htmlhttp://nepalistock.blogspot.com/2007_08_01_archive.htmlhttp://www.siddharthacapital.com/index.php/mutual-fund-basics