Govt inaction puts mutual funds in limbo

Even though mutual funds are becoming one of most popular investment avenues for small and risk-shy investors globally, their presence is negligible in the Nepali market due to the absence of laws.

Market analysts say that many companies are interested in operating mutual funds, but they can't go into business because relevant regulations have not been made.

A mutual fund company collects money from many investors and puts it in stocks, bonds and other securities and passes on the gains or losses to the individual investors. Retail investors see mutual funds as a preferred equity investment route.

The Securities Board of Nepal (SEBON) has been working to create the Mutual Fund Regulations for the last five years, but it has not gone anywhere. Similarly, the Ministry of Finance has not been able to bring out the Trust Act.

“These regulations and the Act must come into effect before any company can operate mutual funds,” SEBON director Niraj Giri said. “As the regulations should be compatible with the Act, we are awaiting its introduction before introducing the regulations.”

Sujeev Shakya, president of Tara Management, said new laws relating to sponsors and asset management companies were needed to start mutual funds.

“The tax laws should be improved. The capital gains tax on individual and institutional investments should be the same, which is 10 and 26 percent respectively at the moment,” he said.

The total net assets of US mutual funds amount to US$ 11.742 trillion while the worldwide value of all mutual funds is more than US$ 26 trillion.

It is estimated that mutual funds have a potential market worth Rs 5 to 10 billion in Nepal. NCM Mutual Fund is the only mutual fund in the country. Analysts said it had been unable to expand because the government had not come out with the necessary laws. Some years back, the central bank had to rescue it by pumping in money.

“It was allowed to begin operation in 1991 on a contractual basis without any specific regulations,” said Giri.

SEBON officials said mutual funds were not properly regulated, and all that the board had done by way of regulation

was set certain norms and guidelines.

Former SEBON chairman Deepak Raj Kafle said mutual funds could play a strong role in stabilizing the stock market that often displays mercurial mood swings.

“Mutual funds are institutional investors who choose shares by doing fundamental analysis instead of acting on a whim,” he said. “Retail investors normally follow their lead and make wise investments.”

He said small investors missed good investment

opportunities like Nepal Telecom shares because of ignorance. If there had been mutual fund companies, they

would have been able to own a part of it.

The government had announced in the budget proposal a string of plans including establishment of a regulatory and supervisory body in order to encourage mutual funds.

But this has been limited to paper so far.

Experts have suggested that the government should allow mutual funds to invest some of their money in the global financial market in order to encourage them.

“It's perfectly OK for a mutual fund to invest in the international market to seek better returns. Ultimately, any gain it makes is brought into the country,” said Kafle.

Source: eKantipur