Introduction of Mutual Fund A mutual fund is a form of collective investment that collects money from investors and invests

the money in stocks, bonds, short-term money-market instruments, and/or other securities. The fund manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed on to the individual investors. One of the main advantages of mutual funds is that they provide small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS. Mutual Fund in Nepal The history of mutual funds companies in Nepal started with the flotation of NCM First mutual fund 2050 by NIDC Capital Markets in 1993. In 2059, NIDC Capital Markets again floated NCM Mutual fund 2059, with NIDC as the trustee. Citizen Unit Scheme were also floated in between which was managed by Citizen Investment Trust. Recently, different commercial banks are interested in the mutual fund companies after the new regulations that allowed commercial bank to sponsor mutual fund companies. Siddhartha Capital has already issued NFO while, NABIL investment, NMB, Laxmi Bank are also lined up to enter in Market. Problem Statements 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 (SBL) with SEBON, which is the first mutual fund as per the regulation. For the operation of various schemes under Siddhartha Mutual Fund, SBL has established Siddhartha Capital Limited (SCL) as the fund manager and depository. In addition, different Mutual Fund Companies are lined up to issue New Fund Offering (NFO).

However, these companies are expected to attract institutional investors only due to the lack of awareness about Mutual Fund among the individual investors. Further, as a result of minimal number of listed companies and as an effect of concentrated securities of Banking and Financial Institutions (BFIs), Nepalese Capital Market lacks diversification. Due to this reason, Mutual Fund Companies may be compelled to buy its own sponsors shares. In the context of Nepal, the transaction costs with the regulators seem to be high as well. Hence, it may restrict the Mutual Fund Companies to provide higher return to the investors. Overall Objectives To assess individual investors knowledge about Mutual Fund. To compare transaction cost of Mutual Fund regulators of Nepal and India. To identify the impact of lack of diversification in Nepalese Stock Market on Mutual Fund. To study the conflicting legal provisions regarding investment in foreign countries by Mutual Fund. Methodology Secondary Data/Information: Secondary data/information will be gathered from relevant websites of different Mutual Fund Companies, regulators, and books. Introduction to the Mutual Fund There are lots of investment avenues available in the financial market for an investor with an investable surplus. It may be Bank Deposits, Stocks, Bonds, and T-bills and so on. Investing in stocks means high return compared to other means, but it is also accompanied by risks. Many people, generally, the small investors dont have much idea about investments. Therefore, if those investors find someone who would invest on their behalf, life would be easier for them. Mutual Fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV).1

Generally, there are two types of mutual fund and they are discussed below: 1. Open-end Mutual Fund: Most mutual funds are open-end funds, which sells new shares continuously or buys them back from the shareholder (redeems them), dealing directly with the investor (no-load funds) or through broker-dealers, who receive the sales load of a buy or sell order. The purchase price is the net asset value at the end of the trading day,
1

Investopedia

which is the total asset of the fund minus its liabilities divided by the number of shares outstanding for that day. 2. Close-end Mutual Fund: A closed-end mutual fund sells shares of the fund in an initial public offering (IPO). After the offering, no more shares are created or redeemed. Therefore, less money is needed to manage the fund, since there is no need to deal directly with individual investors, such as sending periodic statements, and it also eliminates the need to redeem shares to pay investors who want to cash out, such as occurs in open-end mutual funds. Consequently, a closed-end fund can be more fully invested, since it doesnt need much cash, and it is more tax efficient. Benefits and Drawbacks of Mutual Funds Investment The pros and cons may vary from country to country, along with the type of mutual fund, performance of the fund manager, government regulations and so on. Yet there are some general benefits and drawbacks of mutual fund investment which are explained below. Broadly, following are the advantages of mutual fund. Professional Management: Mutual funds give a small investor a chance to invest a low amount in a professional manner. It is not feasible for small investments to be managed professionally, on an individual level, because of low capital and low returns for the managing company. Once you decide on a mutual fund to take care of your investment, all these charges can be avoided. You needn't be an expert in trading or market analysis for making an investment. A professional fund manager makes decisions on behalf of every small investor who put in money through the firm. Diversification: A good investment practice involves diversifying the proportion of investment in different stocks and bonds. It provides the option to hold a number of securities and reduce the risk of losing money, which is not subject to the volatility of a single stock. Low Transaction Costs: If you want to make an individual investment, it would involve a large transaction cost. On the other hand, a mutual fund involves a large amount of capital to be traded. Therefore, it bears a small transaction cost which eventually translates into a small transaction fee to be paid by an investor.

 Liquidity: Mutual funds allow liquidity of assets within a short period. Close end funds may trade below or above NAV, where the investment recovered depends on the NAV of the security invested into. But generally the entire investment can be regained in two business days for open ended funds. Low Initial Costs and Service: No-load mutual funds, which are a part of open-ended mutual funds, do not require transaction costs. An open-ended fund can be bought or sold with no premium or sale charge associated with it. Despite of all the above merits for investing in mutual fund, there are some disadvantages as well which are mentioned below. High Costs and Risks: Mutual funds require a detailed study of the investment options as the fee charged by the management firm can be quite high. The main costs that come along with buying a mutual fund is the management fee that is usually around 1.0% to 1.75% per year for a stock mutual fund. In addition youll have some operating fees that together with the management fee pay for the funds management expenses. On top of that you may incur sales commissions when buying a fund, account service fees and a redemption fee when selling it. Some funds also charge a 12b-1 fee which is an annual marketing or distribution fee for the fund. They are subject to market risks or assets risk as well. If the investment is not sufficiently diversified, it may involve huge losses. Tax issues: Although, the returns on investments are quite high, a mutual fund cannot guarantee lower tax bills. The tax amounts are usually high, especially in case of shortterm gains. Moreover it is the fund manager who handles these issues and you cant dictate terms on the amount of tax to be paid. Investor issues and company profile: In case of repeated investments by new entrants, the value of shares owned by current or existing investor decreases significantly. Also, a mutual fund requires a deep and long term analysis of the amount of investment and its potential investment areas. If the company fund managers are changing regularly, it may adversely affect the returns on your investment. Frequent changes in job position may affect as well.

 No Insurance / No Guarantee: Mutual funds, although regulated by the government, are not insured against losses and also do not guarantee any positive performance during the time you are invested in it. This means that despite the risk-reducing diversification benefits provided by mutual funds, losses can and will occur, and it is possible (although extremely unlikely) that you could even lose your entire investment. Investing of all sorts usually bears some risk and mutual funds, especially when investing in stocks, are a risky investment product. Obviously this is not greatly talked about, but it should be clearly brought to everyones attention before investing any money.

Purpose of the Study The main purpose of doing this project is to know about the mutual fund and its functioning in Nepal taking Indian Mutual Fund as a benchmark. Finding answers to some questions as stated underneath is our whole motive. What were the crucial problems and threats that Indian Mutual Fund faced during the early stages? What were the impacts of these threats on the Indian investors? How did investors react to this problem and what action plan did Indian Mutual Funds prepare to mitigate this problem? What lessons can be learnt from the action plan taken by Indian Mutual Funds? How will Mutual Funds in Nepal react if they happen to face similar problems and threats? How strong is the Nepalese Mutual Fund Regulation designed and supportive to respond to this problem? Apart from digging answers to the above questions, our study have also focused on the main limitations of mutual fund in Nepal which has been a greatest reason for the mutual fund industry not in its full shape. Those limitations are particularly: Lack of diversification in Nepalese market. Higher transaction fees

Research Methodology To carry out the this project work, secondary data are used. The secondary data were collected through various sources from the internet. The JSTOR was used for the literature review and other web was used to know the basic of mutual funds, Indian mutual market, and also international markets.

Literature Reviews Differences in fees charged by mutual fund companies across different countries To assess whether any country's fees are too high, it is useful to put its fees into a global perspective. Some countries have stronger legal systems and regulations that more explicitly protect investor rights. Some countries house larger industries. Some countries have wealthier and more educated populations. Some countries, like the United States or Canada, effectively close their borders to funds domiciled in other countries. In contrast, European nations have open borders, enabling foreign fund promoters to more easily offer funds in many countries. Many of these imported funds are located in international fund centers, such as Luxembourg and Dublin or various island domiciles, such as the Cayman Islands. These characteristics are highly related to the conclusion of a concrete amount of fees. Fees are lower in countries whose judicial systems are superior, where there are regulations requiring an independent custodian, and where there are rules requiring funds to obtain certain approvals. These results apply to the country where the fund is domiciled and where the fund is offered for sale. Management fees are lower in nations with higher per capita GDP, a more educated population, an older and smaller domiciled fund industry, and a less concentrated banking sector (or one where banks are not allowed to enter the securities business). The positive relationship between fees and the size of the domiciled industry and the negative relationship between fees and industry age also hold for expense ratios and total shareholder costs.

Not surprisingly, fund fees vary across investment objectives. Larger funds and fund complexes charge lower fees, as do index funds, funds of funds, and certain funds selling cross-nationally. Funds that sell to institutions and larger accounts have lower fees. Fees are higher for funds distributed in more countries funds domiciled in off-shore locations, and funds sold by fund management companies whose ultimate parent is domiciled abroad. Substantial cross-country differences persist after controlling for these variables.

Mutual Fund in India

Unit Trust of India (UTI) was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. UTI has an extensive marketing network of over 40,000 agents all over the country. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI were to protect the interest of investors in securities and to promote the development of and to regulate the securities market. In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity up to one year. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. The Mutual Funds originated in UK and thereafter they crossed the border to reach other destinations. The concept of MF was initiated only in the later part of the twentieth century in 1960s for a more lively mobilization of household savings to provide investible fund to industry. The idea of first mutual fund in India was born out of the far sighted vision of Sri T. Krishnamachari, the then finance minister. In July 1963, the concept of mutual fund originated in India when Unit Trust of India (UTI) was established with the twin objectives of mobilizing

household savings and investing the funds in the capital market for industrial growth. In 1964, UTI came up with the first mutual fund Unit Scheme, 1964 (US-64) which was the first open ended balanced fund. The mutual fund industry, in India, has appeared as a leading financial intermediary in Indian capital market. As of December 2012, the industry comprising of 43 Asset Management Companies managed financial assets of Rs. 755,894.86 crores.2 Majority of the funds (96%) are open-ended type and the remaining (4%) of the funds are close-ended type.3 The assets have grown at a compounded annualized growth rate of 48 per cent over a period of four decades (1965-2005).4 This shows the growing popularity of mutual funds in the country. The notable growth can be credited to the entry of commercial banks and the private players in the mutual fund industry along with the rapid growth of the Indian capital markets. The remarkable growth of mutual funds in India has influenced the retail investors to invest their surplus funds with different schemes of mutual fund companies with or without complete understanding of Mutual Funds (MF). Further, it has attracted the alertness of Indian researchers, individuals, and institutional investors over the years. The Indian mutual fund industry is no exception and the competition would intensify in the coming years as it happened in other industries. Evolution of mutual funds in India: In India, the mutual fund industry started in 1963 with the formation of Unit Trust of India (UTI). It was started with the initiative of the Government of India and Reserve Bank, which enjoyed its monopoly and supremacy till banking sector mutual fund came into operation in 1987. The history of mutual funds in India can be broadly divided into four different phases. The first three phases can be viewed as pre crisis period. First Phase (1964-87): UTI was established on 1963 by an Act of Parliament which was set up by the Reserve Bank of India (RBI) and functioned under the regulatory and administrative control of the RBI. In 1978, Industrial Development Bank of India (IDBI) took over the
2 3

www.mutualfundindia.com Ray Sarbapriya, Mutual Fund in India: An Analysis of Performance and Some Emerging Issues in Unit Trust of India, 2011 4 www.amfi.com

regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964 (US-64). Thus, Phase I initiated with the establishment of UTI and the launch US-64. At the end of 1988 UTI had Rs. 6,700 crores of assets under management. 5 During this phase, UTI was the only institution offering mutual fund products and it experienced a consistent growth. By June 1987, it had about 2 million investors. During this phase, US-64 became progressively more popular as an option to bank deposits. In 1986, the equity growth fund was launched. This was the first product in India to provide a medium for the entry of small investors into the equity market and proved to be a splendid marketing achievement. Further, 1986 also saw the start of India Fund, the first Indian off-shore fund, which was targeted for overseas investors. Also, it was listed on the London Stock Exchange. Second Phase (1987-1993): Phase II was dedicated mainly to the entry of Public Sector Funds. The impressive performance of UTI especially on the first and largest open ended scheme, i.e. US 64 had given the investing public a rich familiarity of the mutual funds operation. In 1987, the monopoly of UTI came to an end when Government of India permitted Commercial Banks, Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC) to set up mutual fund by amending Banking Regulation Act and Insurance Act. However, the dominance of different schemes of UTI in terms of aggregate investment, earning power, fund mobilization, dividend payment, equity investment, and capital appreciation was much more than any other mutual funds up to 1997 due to efficient asset management. In 1987, the entry of nonUTI was marked with Public sector mutual funds put up by public sector banks, LIC, and GIC. SBI Mutual Fund, established in June 1987, was the first non-UTI Mutual Fund. It was followed by Canbank Mutual Fund (December 1987), Punjab National Bank Mutual Fund (August 1989), Indian Bank Mutual Fund (November 1989), Bank of India (June 1990), Bank of Baroda Mutual Fund (October 1992). In addition, LIC instituted its mutual fund in June 1989 while GIC launched its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.6 To conclude, Phase II saw the beginning of competition in the mutual fund industry with the set up of mutual funds by subsidiaries of the nationalized banks and of the two insurance corporations, i.e. LIC and GIC. During this phase,
5

www.amfiindia.com www.amfiindia.com

there was a spectacular growth in the size of the mutual fund industry. This was proven with investible funds increasing to Rs. 53,462 crores (market value) and the number of investor accounts increasing to over 23 million. The optimistic equity markets in 1991-92 and tax benefits under Equity-linked Savings Schemes increased the attractiveness of equity funds. Third Phase (1993-2003): Phase III witnessed the entry of Private Sector Funds with which a new era started in the Indian mutual fund industry. As a result, Indian investors had a wider choice of fund families. In 1993, the first Mutual Fund Regulations came into existence under which all mutual funds (except UTI) were to be registered and governed. The former Kothari Pioneer, now merged with Franklin Templeton, was the first private sector mutual fund registered in July 1993. The 1993 Securities and Exchange Board of India (SEBI) Regulations for mutual fund were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. Hence, the industry now operates under the SEBI (Mutual Fund) Regulations1996. During this phase, many foreign mutual funds launched funds in India and there were numerous mergers and acquisitions. As a result, the number of mutual fund houses went on increasing. At the end of January 2003, there were 33 mutual funds with total assets of Rs. 121,805 crores and the investible funds of the industry increased to Rs. 78,655 crores with the number of investor accounts increased to 50 million.7 Fourth Phase (2003 and onward): In the initial years of Phase IV, there was significant growth in the mutual fund industry helped by a more positive response in the capital market, major tax benefits, and enhancement in the quality of investor service. Investible funds rose to over Rs. 110,000 crores (market value) with UTI having 68% of the market share. 8 During the year 19992000, sales mobilization reached a record level of Rs. 73,000 crores as against Rs. 31,420 crores in the preceding year.9 However, the trend had sharply inverted in 2000-2001 and investible funds have declined. As a result, there have been significant declines in the NAVs of funds. The graph indicates the growth of assets over the years.

7 8

Ibid www.amfiindia.com 9 Ibid

Limitations of Mutual Fund in India In comparison to the degree of growth and development of mutual funds in developed economies like USA, U.K., Japan, and Australia, Mutual Fund in India is in adolescent stage. Mutual fund in India have not been able to perform up to the expected level and in many cases, have expressed their financial failure to repay the invested capital along with promised rate of returns. Major problems faced by Indian Mutual Funds are as following: 1. Problems Related to the Investors awareness

UTI has established a marketing network of branches, chief representatives, collection centers and franchise offices throughout the country which is its strength as compared to other mutual funds. However, all other mutual funds could not establish such a marketing network and cant compete with UTI in mobilizing public savings from rural and semi urban areas. This is mainly due to lack of awareness and poor after sales service to the investors. The investors from rural and semi-urban areas still believe that the mutual funds promoted by UTI, LIC, and nationalized banks are guaranteed by the Central Government which is not the case in real. The majority of the new investors dont know the concept, functions and merits of investment in mutual funds before investing. The researcher had undertaken surveys of individual investors and members of Ahmadabad Stock Exchange to analyze the awareness of investors about the mutual fund schemes. It was observed that small businessmen, farmers and persons belonging to rural and semiurban areas in low income group had no awareness about the mutual funds.10 2. Problems Related to Performance The schemes are outlined and conceptualize by the top management of the mutual funds and marketed by their branches and through the agents. The agents and the sales executives of the mutual funds promise higher returns to the investors and spread a bright picture about the mutual funds while marketing schemes. As a result, the mutual funds have been wrongly promoted to a certain extent. The ignorance of the investors about mutual funds coupled with aggressive selling by promising higher returns to the investors have resulted into loss of investors confidence due to inability to provide higher returns.11 The agents of mutual funds are more directed by commissions they get for selling the schemes and not by the requirements of the investors and quality of the products. 3. Inadequate Research Most of the Indian mutual funds are suffering due to lack of adequate research facilities. Most of the funds depend on external research and have no facilities for in-house research. 4. Poor Risk Management
10 11

Mehru, K.D., Problems of Mutual Funds in India Mehru, K.D., Problems of Mutual Funds in India

According to a recent survey by Price Waterhouse Coopers, about 50% of the mutual funds are not managing risk properly and another 50% do not have documented risk procedures or dedicated risk managers.12 5. No Rural Sector Investment Base Indian mutual funds so far have not been able to create rural sector investment base. Sufficient efforts have not been made to educate the potential investors. 6. Increased Competition The number of asset management companies is increasing and various schemes provided by them have increased competition. Thus, mutual fund seems to be too busy trying to race against each other. As a result, they lose their stabilizing factor and strengths in the market. 7. Lack of Transparency Transparency is another area where Indian mutual funds are lacking. Investors have right to have the information about where and how the investors money has been deployed. But investors are deprived of getting the information.

As a result of all the above problems of mutual funds in India, the investors interest towards mutual fund has deteriorated.

Limitation of Mutual Fund in Nepal and its comparison with India

12

www.mywhatis.com

Operating Cost Operating expenses are costs incurred by the mutual fund in operating the portfolio which includes administrative expenses and advisory fees paid to investment manager. Mutual fund holder dont receive an explicit bill for these expenses, however, these ex penses are deducted periodically. In addition to the operating cost, cost incurred for the New Fund Offering (NFO) also plays vital role. Cost of NFO in Nepal is comparatively high than India. Indian Mutual Fund Company has advantage in terms of their large size. Therefore, underwriter charge is more for Nepalese company. In addition, trading cost of Nepal Stock Exchange (NEPSE) is also high. Though it is about to incorporate CDS and other technologies which may reduce cost, cost of transaction is high till date. This sort of problem is prevalent in the countries where capital market is least developed. In case of India, trading and underwriting charge is not a headache for mutual fund companies because of availability of large number of underwriting companies and big size of mutual fund. Fees Fees under different heading are charged by regulator of respective country. Fees create another hindrance for mutual fund companies to provide sound return to investors of mutual fund. India (NRs) Application fees Registration Fees Approval Fees Up to 8000 Million (NRS) 8000-16000 Mllion 16000-48000 Million License Fee Fund Manager 0.007%-0.0035% 0.0045% - 0.0015% NA 1000-5000 million 0.15 160000 4000000 0.005% Up to 1000 Million Nepal (NRs) 50,000 1000000 0.20

Above 5000 million 0.10 Fund Manager 200,000

Depository Renewal Fee Fund Manager

NA NA

Depository Fund Manager

50,000 100,000

Depository (Note: Amount converted to Nepali Rupees)

Depository

25000

Above table shows the comparison between the costs to be paid for regulator of India and Nepal. Though the application fees and license fees of India seems to be fairly high, per unit cost will be minimal compare to the size of NFO of Nepalese mutual fund companies. Approval cost of mutual fund in Nepal is very high compared to approval cost of India. If a Nepali Mutual Fund company wants to issue NFO of Rs. 800 million, it has to pay 20 times more than that of Indian Mutual Fund Companies. In addition, limit of other expenses provided by SEBI and SEBON also shows superiority of Indian mutual fund companies. Total Expense Ratio permissible as per SEBI Regulations is maximum 2.5% for equity schemes and 2.25% for debt schemes which is based on the Assets Management of the scheme. This ratio includes the expense of Management Fees, Trustee Fees, Custodian Fees, R&D Fees, Investor Communication Costs, Marketing and Advertising Expenses and Audit Fees. On contrary, in Nepal, a mutual fund companies can charge 2% as management fees, 0.5% as depositary fees and 0.5% as supervisory fees. Total of 3% fees in Nepal does not include cost of R&D Fees, Investor Communication Costs, Marketing and Advertising Expenses and Audit Fees. Limit for management fees is capped by SEBI to 1.25% of net assets less than Rs. 100 crores, and 1.00% on Net Assets more than Rs. 100 crores compared to 2% of Nepalese company. This problem, again, is prevalent in countries where capital market is least developed. In Nepal, we can expect it to be reduced when mutual fund markets get bigger. Diversification of Stock Market Diversification means to invest in multiple stocks across different market segments, instead of putting all of your money into a single stock or single market segment. Diversification can be accomplished in a few ways; either by purchasing multiple stocks in different segments, by investing in an index fund that spans market segments or via mutual fund diversification.

India* No. of Listed Companies No. of Stock Exchange 23rd Jan 2013 Index No. of Industries/Sectors 72 1600 2

Nepal 244 1 498,238.83 Millions

Market Capitalization (as 9,865,621 millions

9**

*Indias data are based on National Stock Exchange (NSE) ** No. of sectors base upon the indices of stock exchange

Though there is no rule of thumb for number of industries/number of stocks for the proper diversification of portfolio, Nepalese markets seem significantly small to have diversified portfolio. Around 76% of stocks of NEPSE are from banking industry. Indian Mutual Fund companies can invest in 72 different industries while NEPSE is limited to banking, hydropower, trading, telecommunication, and construction industry only. National Stock Exchange (NSE) of India provides large array of alternative ranging from banks, pharmaceuticals,

telecommunication, steel, automobile etc. Fund manager can make portfolio in such a way that reduces the risk while optimizes return when large number of stock from diversified industry. In case of Nepal, unsystematic risk of portfolio can be very high given the lack of diversification. Lack of Clear Regulation There are some loopholes in regulations of mutual fund. According to the Mutual Fund regulation 2067, mutual fund companies can invest up to 25% in foreign capital markets. However, no clear guidelines and instruction is provided in law, which has limited mutual fund companies for having diversified portfolio. International diversification is also one risk

management technique.13 Financial theory made it clear that portfolio international diversification has been the best way to increase portfolio earning and reduce global risk, notably systematic risk.14 This limitation can be considered as unique limitation in Nepal, though some critics believe that Indian rules regarding mutual fund is not adequate. Awareness to Individual Investors Mutual fund is still new vehicle of investment for investors. Though NCM mutual fund was issued almost two decades back, this industry has yet to get momentum. Large proportion of individual investors is still unaware about existence of mutual funds. Though we are unable to get exact information about proportion of individual investors, media had reported about 30% of individual investors invested in the NFO of Siddhartha Mutual Fund. In case of India, proportion of individual investors is more than 90%. Though people of rural village are not aware about this, people from top tier cities knows about mutual fund. In Nepalese context, Mutual Fund companies should target the small investor. Due to the small size of Nepalese Market, Mutual Fund companies are not in a position to invest in sector wise scheme. Future prospect of Mutual Fund companies in Nepal Given the limitation in Nepalese scenario, Nepalese Mutual Fund Companies will not have easy days. Lack of knowledge among investors about mutual funds is one of the major problems. If many mutual fund companies come into the market, they may face problems of issuing NFO. From the experience of performance of Siddhartha Mutual Fund and upcoming mutual fund companies, public will decide whether to invest in mutual funds or not. Cost of mutual funds seems very high. This may obstruct the mutual fund companies to provide their target return. In addition, lack of diversified industries in capital market may also plague the mutual fund companies. They may face difficulty to make proper portfolio which provides optimum return at minimum level of risk.

13 14

Gupta and Donlevvy, 2009 Gellai, M. I, Stock market volatility and International diversification

Despite of the limitation of mutual fund in Nepal, it can attract lots of individual investors and help to stabilize Nepali capital. Since institutional involvement in Nepalese stock market is very low, entrance of different mutual fund companies can reduce the power of speculator. Recommendations Cost reduction of regulator Stock market should be equipped with advanced technology, which would help to reduce the cost of trading and adds more facility to stockholder Government should promote business of others sector to come in Nepalese capital market

Economic growth on modern economy hinges on an efficient financial sectors that pools domestic saving and mobilizes foreign capital for productive investment. ((((Geert Bekaret,,Stanford University)