Investment Basics & Nepal’s Market Landscape

TAKEAWAYS:

• Investment ≠ speculation: investment generates cash flows (dividends, interest) while speculation relies on price changes.
• Nepal’s investment ecosystem includes NEPSE (stocks), NMBL (bonds), insurance companies, and banks (fixed deposits).
• Primary markets issue new securities (IPOs, bonds), while secondary markets trade existing ones (NEPSE’s stock exchange).
• The investment process follows six steps: goal setting → risk tolerance assessment → asset allocation → security selection → execution → monitoring.
• Taxes (capital gains, dividend tax), investor life cycle (retirement vs. growth), and economic conditions (inflation, interest rates) critically shape decisions.
• Major sources of investment info: Nepal Rastra Bank reports, NEPSE’s daily bulletins, financial newspapers (The Himalayan Times), and brokerage firm analyses.

1. Investment: Definition, Types, and Key Concepts

Investment is the commitment of funds to purchase financial or physical assets with the expectation of earning a return (income or capital appreciation) over time. Unlike speculation, which bets on price volatility without generating cash flows, investment focuses on cash flow generation (dividends, interest, rent) or appreciation.

Key Differences: Investment vs. Speculation

2. The Investment Environment in Nepal

Nepal’s investment landscape is shaped by regulatory bodies, market infrastructure, and economic conditions. Key players include:

A. Regulatory Bodies

1. Nepal Rastra Bank (NRB)
   • Regulates banks, financial institutions, and capital markets.
   • Sets monetary policy (interest rates, reserve requirements).
   • Publishes financial stability reports (critical for investors).

2. Securities Board of Nepal (SEBON)

   • Oversees NEPSE (Nepal Stock Exchange) and NMBL (Nepal Money and Bond Limited).
   • Regulates mutual funds, insurance, and derivatives.

3. Insurance Board

   • Regulates life and non-life insurance products (e.g., NIC Asia, Siddhartha Insurance).

B. Key Investment Markets in Nepal

3. The Investment Process: A Step-by-Step Guide

Investing is not random—it follows a structured process influenced by taxes, life cycle, and economic conditions.

Six Systematic Steps

Step 1: Define Investment Goals

• Short-term (1–3 years): Emergency fund, vacation.
• Medium-term (3–10 years): Home purchase, education.
• Long-term (10+ years): Retirement, wealth building.

Real-World Example:

eSewa’s Investment Plan for Retirees A 55-year-old using eSewa’s fixed deposit (FD) schemes (6–12% interest) aligns with a low-risk, income-focused goal. NRB’s senior citizen savings scheme (8% interest) is another option.

Step 2: Assess Risk Tolerance

• Conservative: Prefers bonds, FDs, government securities.
• Moderate: Mix of stocks and bonds (e.g., NEPSE’s diversified mutual funds).
• Aggressive: High-risk stocks (e.g., tech IPOs like F1Soft).

Step 3: Asset Allocation

Divide investments across:

• Equities (NEPSE stocks like NMB Bank, Nabil Bank).
• Fixed Income (bonds, FDs).
• Alternatives (real estate, gold, mutual funds).

Worked Example: A 30-Year-Old’s Portfolio

Step 4: Security Selection

• Fundamental Analysis: Evaluate P/E ratio, dividend yield, debt levels (e.g., NMB Bank’s P/E ~15x).
• Technical Analysis: Use moving averages, volume trends (e.g., NEPSE’s 50-day MA crossover).

Step 5: Execute the Trade

• Through Brokers: Merchant Securities, Standard Chartered Securities.
• Online Platforms: eSewa Trade, NEPSE’s online portal.
• Mutual Funds: NMBL’s mutual funds (e.g., NMBL Equity Fund).

Step 6: Monitor and Rebalance

• Quarterly reviews: Adjust portfolio based on NRB’s policy changes or company earnings.
• Tax Efficiency: Nepal’s capital gains tax (1% on stocks, 5% on bonds) must be considered.

4. Factors Affecting Investment Decisions

A. Taxes

• Capital Gains Tax:
  • Stocks: 1% on gains (if held >1 year).
  • Bonds: 5% on interest income.
• Dividend Tax: 10% withholding tax on dividends.

Worked Example: Tax on NEPSE Stock Sale

You buy NMB Bank stock at Rs. 100/share, sell at Rs. 120/share after 1.5 years.

• Gain: Rs. 20/share × 100 shares = Rs. 2,000.
• Tax: 1% of Rs. 2,000 = Rs. 20 (since held <2 years).

B. Investor Life Cycle

C. Economic Environment

• Inflation: High inflation (e.g., Nepal’s 2023 ~6.5%) erodes FD returns (real return = nominal - inflation).
• Interest Rates: NRB’s policy rate hikes increase bond yields but reduce stock attractiveness.
• Political Stability: Elections or policy changes (e.g., FDI restrictions) impact markets.

5. Sources of Investment Information

## In the Real World

1. eSewa’s Fixed Deposit (FD) Schemes
   • Idea Used: Fixed income securities (bonds/FDs).
   • How? eSewa partners with banks to offer 6–12% interest FDs, appealing to risk-averse investors like retirees. The lock-in period (1–5 years) aligns with the investment process’s "goal setting" step.

2. Ncell’s 4G Expansion (IPO in 2019)

   • Idea Used: Primary market (IPO) and secondary market (NEPSE trading).
   • How? Ncell’s Rs. 10.5 billion IPO (2019) raised capital for expansion. Post-IPO, shares traded on NEPSE, where investors bought/sold based on dividend yields and P/E ratios.

3. Daraz’s Logistics Hubs (Real Estate Investment)

   • Idea Used: Asset allocation (real estate + equities).
   • How? Daraz’s warehouse investments (e.g., Kathmandu’s 50,000 sq. ft. hub) diversify risk. For retail investors, REITs (Real Estate Investment Trusts) like NMBL’s property funds offer indirect exposure.

4. NMB Bank’s Bond Issuances

   • Idea Used: Fixed income securities and bond valuation.
   • How? NMB Bank issues 10-year bonds at 9% yield. Investors compare this to FD rates (7–8%) and NEPSE’s dividend yields (~3–5%) before allocating funds.

## Exam Tip

1. Definitions Matter

   • Always define investment vs. speculation, primary vs. secondary markets, and risk tolerance with examples from Nepal (e.g., "NEPSE is a secondary market where existing shares like NMB Bank are traded").

2. Numerical Questions

   • For yield calculations, use: $$\text{Yield}={\left(\frac{\text{Future Value}-\text{Present Value}}{\text{Present Value}}\right)}^{\frac{1}{n}}-1$$ Example: For Rs. 10,000 → Rs. 15,000 in 5 years: $$\text{Yield}={\left(\frac{15,000-10,000}{10,000}\right)}^{\frac{1}{5}}-1=8.45\%\text{ (compounded annually)}$$ Comparison to Required Return (9%): Since 8.45% < 9%, this is a bad investment.

3. Descriptive Questions

   • For "investment environment in Nepal", structure your answer as:
     1. Regulatory bodies (NRB, SEBON).
     2. Market types (NEPSE, NMBL, money market).
     3. Economic factors (inflation, interest rates).
     4. Real-world example: "NEPSE’s market capitalization grew by 20% in 2023 due to FDI inflows in hydropower IPOs."

4. Process Questions

   • For "investment process", use the 6-step flowchart and tie each step to Nepal-specific tools (e.g., "Step 5: Execute via eSewa Trade or NMBL’s mutual funds").

5. Avoid Common Mistakes

   • ❌ Saying "NEPSE is a primary market" (it’s secondary).
   • ❌ Ignoring taxes in calculations (always deduct capital gains tax).
   • ❌ Using global examples without Nepal context (e.g., "NYSE" instead of "NEPSE").

Final Visual Summary

mindmap
  root((Investment in Nepal))
    Basics
      Investment ≠ Speculation
      Key Terms: Yield, P/E, Dividend
    Markets
      Primary: IPOs (NMB Bank)
      Secondary: NEPSE (NMB Bank stock)
      Money Market: Treasury Bills
    Process
      1. Goals → 2. Risk → 3. Allocate → 4. Select → 5. Trade → 6. Monitor
    Factors
      Taxes (1% CGT)
      Life Cycle (Retirees → FDs)
      Economy (NRB Policy Rates)
    Real World
      eSewa (FDs)
      Ncell (IPO)
      Daraz (Real Estate)