Mutual Fund, Pension Fund and other Financial Service Companies

Mutual fund is a financial institution or investment company that collects small savings from a large number of investors by issuing units and invests the pooled fund in a diversified portfolio of securities such as shares, debentures, bonds and government securities. The income and gains earned from these investments are distributed among the unit holders in proportion to their investment. In Nepal, mutual funds are managed by companies like Nabil Balanced Fund, Nabil Equity Fund, Siddhartha Equity Fund and NIC Asia Growth Fund under the regulation of SEBON.

Advantages of investing in mutual funds:

1. Professional management: The fund is managed by expert and experienced fund managers who study the market, select securities and take buy-sell decisions. An ordinary investor who lacks time, knowledge and skill gets expert management of his small savings.

2. Diversification of risk: A mutual fund invests the pooled money in many different companies and sectors. So the loss in one security is offset by the gain in another. This reduces the risk which a small investor cannot reduce by investing in one or two shares only.

3. Small investment and easy liquidity: An investor can start with a very small amount and can buy units as per his capacity. The units are listed on the stock exchange and can be sold back to the fund or in the market whenever the investor needs money. Thus investment is highly liquid.

4. Economy of cost and convenience: Because of large-scale buying and selling, the fund enjoys lower brokerage, lower transaction cost and better bargaining power. These benefits are passed on to the unit holders. Moreover, the investor gets regular information about net asset value (NAV), so record keeping and monitoring become easy and convenient.

Other points (any of these may also be given): regular income and capital appreciation, tax benefits, transparency and safety due to SEBON regulation, and automatic reinvestment facility.

NAV per share is the market value of the fund's holdings (less liabilities, taken as nil here) divided by the number of fund shares issued.

(a) Current value of the portfolio:

$1000 \times 150 + 2000 \times 140 = 150{,}000 + 280{,}000 = \text{Rs } 430{,}000$

$\text{NAV} = \frac{430{,}000}{10{,}000} = \text{Rs } 43$

(b) Expected value at year end:

$1000 \times 180 + 2000 \times 110 = 180{,}000 + 220{,}000 = \text{Rs } 400{,}000$

$\text{Expected NAV} = \frac{400{,}000}{10{,}000} = \text{Rs } 40$

The NAV is expected to fall from Rs 43 to Rs 40 per share, because the loss on ABC (Rs 60,000) is greater than the gain on XYZ (Rs 30,000).

(b) A financial institution that collects savings from many investors and invests them in a diversified portfolio of securities

A mutual fund pools small savings from numerous investors and invests the pooled amount in a diversified portfolio of shares, debentures and other securities, sharing the returns among investors in proportion to their holdings.

Meaning of a Pension Fund

A pension fund is a fund established and maintained by an employer, a government, or a financial institution to provide regular income (pension) to employees or members after their retirement. It is created by collecting periodic contributions from the employer and/or the employees during their working life, and investing those contributions in safe and income-generating securities. On retirement, the accumulated amount is paid to the member either as a lump sum or as a regular monthly pension until death. In Nepal, pension funds are operated for civil servants, employees of organized sectors, and contributors to schemes such as the Employees' Provident Fund and the Social Security Fund.

Objectives of a Pension Fund

1. To provide financial security after retirement: It ensures a regular and assured income to employees in their old age, when they no longer earn a salary, so that they can meet their daily living expenses with dignity.

2. To encourage savings and thrift: By making compulsory or voluntary contributions during the working period, it develops the habit of saving among employees and builds a fund for their future needs.

3. To promote employee motivation and loyalty: A guaranteed pension scheme gives employees a sense of security and belonging towards the organization, which increases their morale, efficiency and long-term commitment to the job.

4. To mobilize savings for productive investment: The contributions collected in the fund are invested in government securities, shares, debentures and other safe avenues, which helps in the capital formation and economic development of the country.

Concept of Mutual Funds

A mutual fund is a collective investment scheme in which many investors pool their savings, which is then invested and managed by a professional fund manager (a fund house or asset management company) on their behalf. Each investor receives units of the fund in proportion to the amount invested. The fund invests the pooled money in a diversified portfolio of shares, debentures, government securities and other money-market instruments. The income earned (dividends, interest, capital gains) is distributed among unit-holders after deducting the fund's management expenses. The main advantages are diversification of risk, professional management, liquidity, low minimum investment and convenience, while the return depends on the performance of the underlying securities. Examples in Nepal: Nabil Balanced Fund, Siddhartha Equity Fund, NIC Asia Growth Fund.

Concept of Pension Funds

A pension fund is a fund created to provide retirement income to employees after they retire from service. Regular contributions are made during the working life of the employee — usually by the employer, the employee, or both — and this money is invested to earn a return. On retirement, the accumulated amount is paid to the employee either as a lump sum or as a monthly pension for the rest of his or her life. Pension funds are usually managed by a separate trust or by the employer itself. In Nepal, examples are the Employees' Provident Fund (EPF), the Citizens' Investment Trust (CIT) pension schemes, and the pension plans of the Nepal Army, Nepal Police and civil service.

Differences between Mutual Funds and Pension Funds

(Any four of the above, or other valid points such as risk level, regulation, return, and management, may be given.)