Chapter 12 · Mutual Funds
Mutual funds, NAV, and the two prices a Nepali scheme has
Open-end against closed-end, NAV worked from a balance sheet, discount and premium, and what an expense ratio costs over ten years.
Two prices for the same fund
A mutual fund scheme collects money from many investors, appoints a manager, and buys a portfolio under a stated mandate. What you hold is a unit. What the unit is worth is the NAV. What you can sell it for depends entirely on the structure.
Three structures, three ways to transact
| Structure | Who you buy from | The price you get |
|---|---|---|
| Open-ended | The fund itself, any business day | NAV at the next valuation point |
| Closed-end, listed | Another investor, on the exchange | Market price — which need not equal NAV |
| Interval | The fund, but only in stated windows | NAV, when the window is open |
Nepal's schemes are the middle row. They are closed-end, listed on NEPSE with Mutual Fund as its own sector, issued for a fixed tenure — commonly seven to ten years — and managed by a fund-management subsidiary of a bank, under SEBON supervision. At maturity the scheme is wound up and unitholders are paid out at NAV.
Worked: computing NAV
A scheme's portfolio at a valuation date:
| Item | Amount |
|---|---|
| Listed shares, at market value | Rs 92 crore |
| Debentures and bonds | Rs 12 crore |
| Bank balance and receivables | Rs 4 crore |
| Total assets | Rs 108 crore |
| Less: payables and accrued expenses | Rs 2 crore |
| Net assets | Rs 106 crore |
| Units outstanding | 1 crore |
NAV per unit = Rs 106 crore ÷ 1 crore units = Rs 106.00.
Worked: discount and premium
NAV is Rs 106. The scheme trades on NEPSE at Rs 88.
- Discount = (88 − 106) ÷ 106 × 100 = −17.0%.
- In plain terms: you are buying Rs 106 of assets for Rs 88.
- Two ways that pays off — the NAV rises, or the discount narrows. Near maturity the discount is usually forced to narrow, because the scheme must pay out at NAV.
- Two ways it does not — the NAV falls, or the discount widens further. A discount that has been 15% for three years can become 25%.
Worked: what an expense ratio costs over ten years
Rs 1,00,000 invested. Gross return 12% a year. Expense ratio 2%, so the investor receives 10%.
| Rate | Value after 10 years | |
|---|---|---|
| Gross, before costs | 12% | Rs 3,10,585 |
| Net, after a 2% ratio | 10% | Rs 2,59,374 |
| Difference | — | Rs 51,211 |
The fee was 2% a year, but it consumed 16.5% of the final value. Costs are charged on the whole balance every year, including on the growth earlier costs would have produced. That is why a percentage that sounds small does not stay small.
What to check before buying a scheme
- 1The NAV history against the NEPSE index over the same period. A scheme up 20% in a year the index rose 30% did not do well.
- 2The discount history, not just today's discount. If it has averaged 12% and sits at 12%, there is no bargain in the discount itself.
- 3Years to maturity. The closer to wind-up, the more reliably the discount closes.
- 4The portfolio disclosure. Schemes publish holdings. If the top holdings are the same banks you already own directly, you have concentrated, not diversified.
- 5The expense ratio, read against the table above rather than as a number in isolation.
Saved in this browser only — there is no account to create. Clearing your browser data clears your progress.