###### 1. Why the price of the shares of an open-end fund cannot fall below its net asset value?

The price of shares of an open-end fund cannot fall below its net assets value because an open-end fund always stands ready to redeem shares at net asset value.

###### 2. Briefly describe the meaning of closed end-fund?

Closed-end funds are investment companies that operate by issuing fixed number of shares and do not regularly issue the shares. In other words, these types of investment companies do not sell and purchase their shares continuously after the initial issue.

###### 3. What do you mean by expense ratio?.

The expense ratio is the operating expenses of mutual funds expressed as a percentage of net asset value at the beginning. It is calculated as the operating expenses excluding brokerage divided by beginning net asset value. The mutual fund that has lower expense ratio is considered to be better for investors.

###### 4. List out different fees that a mutual fund charges to its investors? A mutual fund charges different fees to investors. They are as follows:
•  Maintenance fees
• 12B-1 fees
• Transaction costs
• Accounting, distribution and other miscellaneous costs.
###### 5. Nabil Equity Fund’s net asset value per share is Rs. 20. If the fund’s front end load fee is 5 percent, what should be the offer price?

SOLUTION

Given:

NAV per share= Rs 20

Front-end load fee (f) = 0.05

The offer price is given by:

Offer price = NAV per share / 1-f =  R\$ 20 / 1 -0.05 = Rs 21.05

###### 7. A mutual fund with 100,000 shares outstanding has Rs 15 million in assets and Rs 0.1 million in liabilities. What is its NAV per share?

Given:

Outstanding shares = 100,000 shares

Assets = Rs 15,000,000

Liabilities = Rs 100,000

Net asset value per share is given by:

NAV per share = Market value of assets – Liabilities / Number of shares  outstanding

=Rs 15,000,000-Rs 100,000 / Rs 100,000

= Rs 149

###### 8. The net asset value of a closed end mutual fund is Rs 25 and it is currently selling at Rs 20. What is the premium or discount ?

Given:

Net asset value per share (NAV) = Rs 25

The market price = Rs 20

Since the shares of the closed-end fund are selling below NAV, it is trading at

discount. The discount is given by:

Discount =  NAV –  Market price /  NAV = Rs 25 – Rs 20 /  Rs 25

= 0.20 or 20%

###### 1. What are the advantages of Investment Company?

The role/advantages of investment company or mutual funds in the development of capital market in Nepal can be described as follows:

• Expert investment services: Mutual funds are professionally managed because they hire professional portfolio managers in making buy-sell decisions of securities. Thus investors in capital market of Nepal have received professional and expertise investment services from mutual funds.
• Benefit of diversification: Investors in capital market of Nepal can get the benefit of diversification by investing into the units of mutual funds. Mutual funds create a pool of funds generated from large number of investors by selling their units and invest those funds into larger number of different securities. Investment companies create a well diversified public portfolio of investment.
• Opportunity to small investor. Mutual funds have created better opportunity to small investors for investing in capital market of Nepal. The small investors with small fund to invest are not able to maintain the diversified portfolio individually for them. However, they can go by making investment into the units issued by mutual funds. All investors have their proportional ownership on the diversified portfolio created by the mutual funds.
• Lower portfolio expenses: Managing a well diversified portfolio is costly and time consuming for individual investors. However, mutual funds hire professional portfolio managers and they trade in large volume so that economies of scale also can be achieved by investing through mutual funds in Nepal.
###### 2. What are the differences between Closed-End Fund and Open-End Fund?

Closed-end and open-end funds are both investment companies. However, they are different from each other in certain grounds. The differences between closed-end fund and open-end fund are described below.

 Closed-end Fund Open-end Fund Closed-end funds do not issue and redeem shares regularly. Open-end funds stand ready to buy and sell their shares at net asset value at any time. The share price of closed-end funds is determined by demand and supply in the secondary market and the price may deviate from net asset value. The share price of open-end funds do not deviate from net asset value because the open-end funds are ready to buy and sell their shares at net asset value any time. The number of outstanding shares of closed-end funds does not vary. The number of outstanding, shares of closed-end funds changes over time as they buy the outstanding shares and sell the new shares. Closed-end funds are allowed to hold liabilities and can borrow as well Open-end funds are generally not allowed to hold liabilities.
###### 3. Explain in brief the development of mutual fund in Nepal.

Mutual fund in Nepal is of recent origination. It was begun with the inception of NCM mutual fund-2050 by NIDC capital market. The fund initially operated as open-end fund with Rs 10 par value per share of its unit. Later in 2059, this fund was converted into closed end fund. This fund has been listed in Nepal Stock Exchange. The investment policy of NCM Mutual Fund is to invest maximum 65 percent on shares, 15 percent on debenture and 20 percent on term loan. Similarly, it does not invest more than 10 percent of its paid up capital into the shares of a single company.

Another popular mutual fund in Nepal is the Citizen Unit-Scheme (CUS) which was established by Citizen Investment Trust in the fiscal year 1994/95.

This fund has been operated as open. end fund with Rs 100 par value of its unit. CUS basically invests in government securities, fixed deposits at commercial banks, shares and debentures, and term loan.

There is a good number of closed-end funds established in the later period after the enactment of Mutual fund Regulation 2010. For example, Siddhartha Growth Scheme I (SIGS-I) and Siddhartha Equity Oriented Scheme (SEOS) are some closed end funds established by Siddhartha Capital Limited. The SIGS-I scheme was launched on 25th December 2012 and it will expire on 24th December, 2017. Similarly, SEOS was launched on 23rd July 2014 and expires on 22nd July, 2019. Another closed end fund is created by Nabil Investment banking Limited as Nabil Balance Fund I scheme worth Rs 750 million. The scheme matures in 5 years. Other development in mutual funds in Nepal includes Laxmi Value Fund I of Laxmi Capital Market limited. It is a closed end scheme with base size of Rs 500 Million and having a specified duration of 5 years. Besides, NIBL capital has issued closed-end fund NIBL Samriddhi Fund-I worth Rs 1,000 million with 7 years maturity. In the recent period, Global IME Capital limited has offered Global IME Samunnat Scheme I fund of Rs 800 million and Nabil Invest has issued Nabil equity Fund with 7 years of maturity.

###### 4. What is mutual fund? Explain its role in the development of capital market in Nepal. Mutual Fund

Mutual funds are large size open-end investment companies. They continuously purchase their own shares and issue new shares to investors. They create a pool of funds by selling their shares called units and use the funds to create large size public portfolio of investment. Capitalization of mutual fund is open and therefore the number of shares outstanding changes frequently. Nepalese capital market was basically categorized by the small individual investors in the past. However, the inception of mutual funds in Nepal has started the participation of institutional investors in the capital market of Nepal.

Role/Advantages of Mutual Fund in the Development of Capital Market

• Expert investment services: Mutual funds are professionally managed because they hire professional portfolio managers in making buy-sell decisions of securities. Thus investors in capital market of Nepal have received professional and expertise investment services from mutual funds.
• Benefit of diversification: Investors in capital market of Nepal can get the benefit of diversification by investing into the units of mutual funds. Mutual funds create a pool of funds generated from large number of investors by selling their units and invest those funds into larger number of different securities. Investment companies create a well diversified public portfolio of investment.
• Opportunity to small investor. Mutual funds have created better opportunity to small investors for investing in capital market of Nepal. The small investors with small fund to invest are not able to maintain the diversified portfolio individually for them. However, they can go by making investment into the units issued by mutual funds. All investors have their proportional ownership on the diversified portfolio created by the mutual funds.
• Lower portfolio expenses: Managing a well diversified portfolio is costly and time consuming for individual investors. However, mutual funds hire professional portfolio managers and they trade in large volume so that economies of scale also can be achieved by investing through mutual funds in Nepal.
###### 5. Hamro Lagani Kosh, a closed-end investment company, has a portfolio of assets worth Rs. 1,000 million. It has liabilities of Rs. 5 million and 50 million shares outstanding.
1. Calculate the fund’s net asset value per share? What does it mean?
2. Assume that the fund trades at 10 percent discount from its net asset value, what is the market price of the fund’s shares?
3. Describe briefly the development of mutual funds in Nepal.

SOLUTION

Given;

Total assets = Rs 1,000 million

Liabilities = Rs 5 million

Number of shares outstanding (N) = 50 million

1. The fund’s net asset value (NAV) per share is given by

NAV =Total assets – Liabilities /  Shares outstanding

=Rs 1,000 – Rs 5 / 50 = Rs 19.90

1. If the fund trades at 10 percent discount from its net asset value, the market price of the fund’s shares is given by: Market price = NAV (1 – discount) = Rs 19.90 (1 – 0.10) = Rs 17.91g
2. The development of mutual funds in Nepal The history of mutual fund in Nepal is not long. It was started with the establishment of NCM mutual fund-2050 established by NIDC capital market. The fund was initially open-end type with Rs 10 par value. It was converted into closed-end fund in the name of NCM mutual fund- 2059. Citizen Unit Scheme (CUS) is another fund operating in Nepal established by Citizen Investment Trust (CIT) in 1994/95. The fund is open-end type with Rs 100 face value.

Closed-end funds are being popular in Nepal. Siddhartha Capital Limited is the first company to conceptualize and issue mutual fund schemes as per the Mutual Fund Regulation, 2010. It is currently managing two close-ended schemes namely Siddhartha Growth Scheme I (SIGS-I) and Siddhartha Equity Oriented Scheme (SEOS). Nabil Investment Banking Limited (Nabil Invest) has also offered Nabil Balance Fund I scheme worth Rs 750 million. The other mutual funds in Nepal includes Laxmi Value Fund I, NIBL Samriddhi Fund-I, Global IME Samunnat Scheme I, among others.

6. A closed-end fund starts the year with a net asset value of Rs 12.00. By year end, NAV equals Rs 12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the end of the year, the fund is selling at a 7% discount to NAV. The fund paid year end distributions of income and capital gains of Rs 1.50.

1. What is the rate of return to an investor in the fund during the year?
2. What would have been the rate of return to an investor who held the same securities as the fund manager during the year?

SOLUTION

Given:

Net asset value at the beginning (NAV) = Rs 12

Net asset value at the end (NAV₁) = Rs 12.10

Selling price at the beginning (Po) = Rs 12 (1 + 0.02) = Rs 12.24

Selling price at the end (P₁) = Rs 12.10 (1-0.07) = Rs 11.253

Income and capital gain distribution (C₁) = Rs 1.50

The rate of return to an investor in the fund during the year is given by:

7. Himal Capital Ltd. operates a closed-end fund (Himal Mutual Fund) with a portfolio currently worth Rs 90 million. It has liabilities of Rs 2 million and 6 million shares outstanding.

1. What is the net assets value (NAV) of the Himal Mutual fund?
2. If Himal Mutual fund’s current market price is Rs 15, what is the percentage premium or discount that will appear in the listing in the financial newspapers?

Given;

Outstanding shares = 6,000,000 shares

Assets Rs 90,000,000

Liabilities = Rs 2,000,000

8. An investor’s portfolio currently is worth Rs 1 million. During the year, the investor sells 1,000 shares of Everest Limited at a price of Rs 80 per share and 2,000 shares of Makalu Limited at a price of Rs 40 per share. The Proceeds are used to buy 1,500 shares of Annapurna Limited at Rs 100 per share.

1. What was the portfolio turnover rate?
2. What does it indicate?

SOLUTION Given:

Beginning NAV = Rs 1,000,000

Value of securities sold  = 1,000 x Rs 80+ 2,000 x Rs 40

= Rs 80,000+ Rs 80,000 = Rs 160,000

Value of securities purchased = 1,500 x Rs 100 = Rs 150,000

Ending NAV = Rs 1,000,000 – Rs 160,000+ Rs 150,000 = Rs 990,000

The portfolio turnover ratio is given by:

Portfolio turnover =  Minimum Value of Securities Purchased or Sold / (Ending NAV + Beginning NAV)/2

=Rs 150,000 / (Rs 990,000+ Rs 1,000,000)/2

= 0.1508 or 15.08%

Portfolio turnover measures how actively the portfolio manager changes its portfolio or buys and sells securities from its portfolio. Actively managed mutual funds make numerous portfolio revisions that result in large portfolio turnover ratios.

9. An investor has Rs 10,000 to invest. He is considering the following funds, all of which have a Net Asset Value (NAV) of Rs 10 per share. Closed end fund “P” is selling for a market price that equals its NAV whereas closed end fund “Q” is selling at a discount of 20 percent. The broker charges a commission of 2 percent on the market price for each share purchased. Mutual fund “R” is no. load fund, whereas mutual fund “S” charges an 8.54 percent load.

1. How many shares does the investor end up with in each case?
2. Which fund you should purchase?

SOLUTION

Given:

10. The Xpress Fund, a close-end investment company, has a portfolio of assets worth Rs 500 million. It has long-term liability of Rs 1 million and current liabilities of 0.5 million. It has 40 million shares outstanding.

1. What is the fund’s NAV?
2. If the shares trades at 8 percent discount from its NAV, what is the market price of the fund’s share?

SOLUTION

Given:

Outstanding shares = 40,000,000 shares

Assets = Rs 500,000,000

Liabilities = Rs 1,500,000

net asset value per share is given by:

NAV per share = Market value of assets-Liabilities / Number of shares outstanding

= Rs 500,000,000-Rs 1,500,000  / 40,000,000 = Rs 12.4625

Hence, the net asset value per share is Rs 12.4625.

If the shares trade at 8 percent discount from its NAV, the market price of fund’s share (Po) is given by:

Market price (Po) = NAV per share (1 – discount)

= Rs 12.4625 (1 -0.08) = Rs 11.4655

Hence, the fund is selling at Rs 11.4655

###### 11. Suppose the mutual fund has the following assets and liabilities:

Stock Rs 500,000

Bonds Rs 200,000

Account payable Rs 250,000

There are 1000 shares outstanding.

1. What is the NAV?
2. Suppose the firm sells another 100 shares, what is the selling price if the load fee is 2 percent?

SOLUTION Given:

Assets = Rs 500,000+ Rs 200,000 = Rs 700,000

Liabilities (Accounts payable) = Rs 250,000

Number of shares outstanding = 1,000 shares

1.  Net asset value per share:

NAV = Assets-Liabilities / Number of share

=Rs700,000-Rs250,000 / 1,000

=Rs450

2. If load fee is 2 percent the selling price is given by:

Selling price = NAV / (1 – Load fee) = Rs450/ (1 -0.02)

= Rs 459.1837

12. On January 1, the Pashupati Value Fund, an investment company has a portfolio of assets worth Rs 102 million and liabilities of Rs 2 million. If it has 4 million shares outstanding on that date.

1. What is the Fund’s NAV?
2. Suppose the Fund makes income and capital gain distribution of respectively, Rs 2 and Rs 3 per share and ends the month with a net asset value of Rs 27, what is the monthly return?
3. Suppose, an investor paid Rs 26 (Re. 1 being front-end load) per share, what is the investor’s return for the month?

SOLUTION

###### 1. What is mutual fund? Discuss how mutual fund has developed in Nepal.

Mutual funds are large size open-end investment companies. They continuously purchase their own shares and issue new shares to investors. They create a pool of funds by selling their shares called units and use the funds to create large size public portfolio of investment. Capitalization of mutual fund is open and therefore the number of shares outstanding changes frequently. Nepalese capital market was basically categorized by the small individual investors in the past. However, the inception of mutual funds in Nepal has started the participation of institutional investors in the capital market of Nepal.

Mutual fund in Nepal is of recent origination. It was begun with the inception of NCM mutual fund-2050 by NIDC capital market. The fund initially operated as open-end fund with Rs 10 par value per share of its unit. Later in 2059, this fund was converted into closed end fund. This fund has been listed in Nepal Stock Exchange. The investment policy of NCM Mutual Fund is to invest maximum 65 percent on shares, 15 percent on debenture and 20 percent on term loan. Similarly it does not invest more than 10 percent of its pid up capital into the shares of a single company.

Another popular mutual fund in Nepal is the Citizen Unit Scheme (CUS), which was established by Citizen Investment Trust in the fiscal year 1994/95. This fund has been operated as open end fund with Rs 100 par value of its unit. CUS basically invests in government securities, fixed deposits at commercial banks, shares and debentures, and term loan.

There is a good number of closed-end funds established in the later period after the enactment of Mutual fund Regulation 2010. For example, Siddhartha Growth Scheme I (SIGS-I) and Siddhartha Equity Oriented Scheme (SEOS) are some closed end funds established by Siddhartha Capital Limited. The SIGS-I scheme was launched on 25th December 2012 and it will expire on 24th December, 2017. Similarly, SEOS was launched on 23rd July 2014 and expires on 22nd July, 2019. Another closed end fund is created by Nabil Investment banking Limited as Nabil Balance Fund 1 scheme worth Rs 750 million. The scheme matures in 5 years. Other development in mutual funds in Nepal includes Laxmi Value Fund I of Laxmi Capital Market limited. It is a closed end scheme with base size of Rs 500 Million and having a specified duration of 5 years. Besides, NIBL capital has issued closed-end fund NIBL Samriddhi Fund-1 worth Rs 1,000 million with 7 years maturity. In the recent period, Global IME Capital limited has offered Global IME Samunnat Scheme, I fund of Rs 800 million and Nabil Invest has issued Nabil equity Fund with 7 years of maturity. The basic contributions of mutual funds in Nepal are stated as below:

• Investors in capital market of Nepal have received professional and expertise investment services from mutual funds.
• Investors in capital market of Nepal can get the benefit of diversification by investing into the units of mutual funds.
• Mutual funds have created better opportunity to small investors for investing in capital market of Nepal. The small investors with small fund to invest can go by making investment into the units issued by mutual funds.
• Mutual funds hire professional portfolio managers and they trade in large volume so that economic of scale also can be achieved by investing through mutual funds in Nepal.
###### 2. Q.No.
1. What is the net asset value of an investment company with Rs 10,000,000 in assets, Rs 790,000 in current liabilities, and 1,200,000 shares outstanding?
2. If an investor buys shares in a no-load mutual fund for Rs31.40 and the shares appreciated to Rs44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on investment?

SOLUTION

Given:

Thus,

Rate of return = (44.154 – 31.40) / 31.40 = 0.4062 or 40.62%

The exit fee reduces the rate of return from 42.04 percent to 40.62 percent.

3. The Neptune Value Fund has sold 150,000 shares to investors. Currently, the fund has accrued investment management fee obligations of Rs50,000. The fund’s portfolio is shown below. Calculate the fund’s net asset value.