Investment Funds & Mutual Funds: Types, NAV, Rights Issues & Real-World Use

What Are Investment Funds?

Investment funds pool money from multiple investors to buy a diversified portfolio of securities (stocks, bonds, etc.). They are managed by professional fund managers and offer investors:

• Diversification (reducing risk by spreading investments)
• Professional management (expert decision-making)
• Liquidity (easy buying/selling of fund shares)

Types of Investment Funds

mindmap
  root((Investment Funds))
    Mutual Funds
      Open-End
      Closed-End
    Hedge Funds
    Exchange-Traded Funds (ETFs)
    Real Estate Investment Trusts (REITs)
    Pension Funds
    Citizen Investment Trusts (CITs)

1. Mutual Funds

• Open-End Funds: Shares can be bought/sold at NAV (e.g., NMB Mutual Fund).
• Closed-End Funds: Fixed shares; trade at market price (e.g., NEPSE-listed funds).
• NAV Calculation:

  NAV per share = (Total Assets – Total Liabilities) / Total Shares Outstanding
  

2. Citizen Investment Trusts (CITs)

• Nepal’s version of mutual funds, regulated by SEBON.
• Minimum investment: Rs. 10,000.
• Example: NMB CIT (invests in government securities).

3. Pension Funds

• Managed by Social Security Fund (Nepal).
• Invests in bonds, stocks, and real estate for retirees.

How Mutual Funds Work: A Kathmandu Retail Shop Example

Scenario: Kathmandu Retail Ltd. wants to expand but lacks capital. It issues rights shares to existing shareholders.

Step 1: Rights Issue Mechanics

• Current Market Price: Rs. 150 per share.
• Shares Outstanding: 2,000,000.
• New Shares Offered: 1 for every 5 existing shares (total 400,000 new shares).
• Subscription Price: Rs. 120 per new share.

Step 2: NAV Calculation (Post-Issue)

Assume:

• Total Assets: Rs. 300,000,000
• Liabilities: Rs. 50,000,000
• Shares After Issue: 2,400,000

NAV = (300,000,000 – 50,000,000) / 2,400,000 = Rs. 104.17 per share

In the Real World

1. Ncell’s Mutual Funds

   • Ncell’s Ncell Mutual Fund (via NMB) lets investors buy shares in telecom stocks (e.g., NTC) at NAV.
   • How it works: You invest Rs. 50,000; the fund buys NTC shares (diversified across sectors).

2. Daraz’s Logistics as a "Fund"

   • Daraz’s warehouse network acts like a closed-end fund: fixed capacity (assets = warehouses), liabilities = unpaid seller orders, and "shares" = delivery slots.
   • NAV analogy: If Daraz has 10 warehouses (assets) and 2 liabilities (unpaid orders), its "NAV per slot" = (10 – 2)/total slots.

3. NEPSE’s Rights Issues

   • Himalaya Power Company (NEPSE: HIMAL) raised Rs. 50M via rights issues in 2023.
   • Calculation: 2,000,000 shares × Rs. 150 = Rs. 300M market cap. New shares diluted NAV but kept control with existing shareholders.

Key Formulas & Worked Example

Formula 1: Net Asset Value (NAV)

NAV = (Total Assets – Total Liabilities) / Total Shares Outstanding

Example: Green Food Ltd. has:

• Assets: Rs. 6,800,000 (stocks)
• Liabilities: Rs. 300,000
• Shares: 500,000

NAV = (6,800,000 – 300,000) / 500,000 = Rs. 13 per share

Formula 2: Rights Issue Price

Rights Issue Price = (Market Cap + New Funds) / (Shares Outstanding + New Shares)

Example: Himalaya Power (Market Cap = Rs. 300M, New Funds = Rs. 50M, New Shares = 400,000):

Price = (300M + 50M) / (2M + 400K) = Rs. 133.33

Open-End vs. Closed-End Funds

Exam Tip

1. Memorize NAV Formula: Always subtract liabilities before dividing by shares.
2. Rights Issues: Calculate new share price using (Market Cap + New Funds) / (Shares + New Shares).
3. CITs vs. Mutual Funds: CITs are Nepal-specific; mutual funds are global (e.g., Fidelity).
4. Real-World Link: Relate NAV to Khalti’s wallet balance (assets = money, liabilities = pending transactions, shares = your transactions).
5. Short Notes: For CITs, mention SEBON regulation and minimum Rs. 10,000 investment.

Visual Summary:

flowchart TD
    A["Investor Money"] --> B["Fund Manager"]
    B --> C["Buys Stocks/Bonds"]
    C --> D["Portfolio Grows"]
    D --> E["NAV Calculated"]
    E --> F["Shares Redeemed at NAV"]
    F --> A
    G["Rights Issue"] --> H["New Shares for Existing Investors"]
    H --> D