Investment Education: What is Mutual Fund? Why and how to invest in it?

A mutual fund is a collective investment scheme that collects money from many investors and invests that money in shares, bonds, bank deposits and other securities. Simply put, many people deposit small amounts of money and invest that amount in the market with a professional fund manager. Not all investors have the time, knowledge and experience to pick a company. It is not easy to distinguish who is right to buy bank shares, whose hydropower is risky, which company's price is expensive or cheap. In such a situation, the mutual fund invests the investor's money not in a single company, but in different sectors. This is why mutual funds can become an easy way for new investors to enter the stock market.

Mutual funds in Nepal operate under the regulation of the Securities Board. The Securities and Exchange Board publishes regulations and guidelines on mutual funds, and details of mutual funds and schemes are available on the Board's website. Why invest in mutual funds? You can start investing with a small amount Investing in mutual funds does not require a large sum of money. A public issue of a closed-end mutual fund can generally be applied for in the same way as an IPO. In open-ended mutual funds, one can start investing with a small amount regularly or in one lump sum as per the plan.

Risk is not limited to a single company Direct equity investment, if a large amount of money is invested in one company, the investment may be greatly affected if that company is weak. A mutual fund can invest by allocating funds across different companies, sectors and instruments. This is called diversification. Diversification does not completely eliminate risk, but it helps reduce the risk of depending on a single company. Professional management is available Mutual fund funds are managed by the fund manager. They make investment decisions by looking at the market, the company's financial condition, risk, liquidity and potential returns. This can be useful for investors who do not have time to study the market in depth.

Helps new investors learn the market New investors can make many mistakes when choosing direct shares initially. Investing through mutual funds makes it easy to understand market fluctuations, returns, risk and the importance of patience. It helps in developing investment habit. Regular investment options are available Regular investments can be made through SIP in open-ended mutual funds. The money can be invested in SIP every month or for a fixed period. Such regular investments reduce the pressure of timing the market and can help build long-term capital. Many Nepali fund managers say that it can be a mistake to choose a short period in the SIP, stop the SIP when the market falls and invest without linking to the target.

Types of Mutual Funds Open-Ended Mutual Funds Open-ended mutual funds do not have a fixed maturity period. Investors can buy or sell back units from the fund manager as per the scheme. Its value is determined on the basis of net asset value. Open-end funds can be useful for regular investment, capital formation and long-term capital formation. The main difference between open-end and closed-end funds in Nepal is that in open-end funds, the unit purchase and sale is done with the fund manager, while closed-end funds are traded in NEPSE.

Closed-end mutual funds A closed-end mutual fund is a fixed term scheme. Such a fund initially issues a fixed number of units. After the application period, those units can be listed in NEPSE and traded in the secondary market. A closed-end fund can be applied for at the IPO stage or bought from the secondary market through a broker account after listing. What is NAV? NAV is important when understanding mutual funds. NAV i.e. Net Asset Value is the real asset value per unit of the fund. In simple terms, NAV is how much a fund is worth per unit after calculating its assets and liabilities.

Market price may be above or below NAV when closed-end mutual fund trades in NEPSE. If the fund's NAV is Rs 10 but it is trading at Rs 9 in the market, it is considered to be trading at a discount. If it is traded at Rs 11 then it is considered to be traded at a premium. But discount doesn't always mean good and premium doesn't always mean bad; One should also look at the fund's portfolio, returns, market conditions and management.

How to invest in mutual funds in Nepal? Opening of demat account A demat account is required to invest in mutual funds. Fund units are deposited electronically in demat accounts. A demat account can be opened through a bank, capital or depository member servicing institution. My share and C-ASBA facility withdrawal I need my shares and C-ASBA facility to apply for public issue of closed-end mutual fund. My shares can be applied for mutual fund like IPO. The process used is to login to My Shares and go to the Asba section to select open issues, enter bank account and CRN details, select shares and confirm the application.

How to invest in closed-end funds There are two ways to invest in closed-end funds. First, to apply through my shares when the public issue opens. Second, buy units from the secondary market through a broker account after the fund is listed on NEPSE. While buying from the secondary market, one should look at the market price, NAV, transaction amount and tenure of the fund. How to Invest in Open-Ended Funds To invest in an open-ended fund, application can be made through the relevant fund manager or capital's online system, branch or designated channels. Such funds can be invested in lump sum or can be invested regularly through SIPs. Buying and selling of open-ended funds is usually done on the basis of NAV.

What to look for when choosing a fund? While choosing a mutual fund one should look at fund type, NAV, market value, past returns, portfolio structure, expense ratio, dividend history, maturity, liquidity and experience of the fund manager. In closed-end funds, the amount of turnover in NEPSE is also important, as it may be difficult to sell a fund with low turnover. There is no risk in mutual funds? Mutual funds are an easy option, but not without risk. If the market in which the Fund invests declines, the NAV of the Fund may decline. A closed-end fund may trade below its market value NAV. The return is not certain. Mutual fund investment is associated with market risk, so one should invest only after understanding the scheme details and risks well.

Who can it be useful for? Mutual funds can be useful for new investors, people who don't have time to study the market, people who want to start investing with a small amount, people who want to invest regularly and investors who want to spread the risk across different sectors. But it can also be risky for people who are looking for high profits in a short period of time, panic at every ups and downs of the market or invest without understanding the plan. A mutual fund is not a magic tool that will make other people make money. It is a systematic way of investing in the market. Choosing the right fund, thinking long-term, regularly reviewing and investing with an understanding of risk can be a good start to mutual fund investing education.