Nepal's Open-Ended Funds Under Scrutiny: Siddhartha Capital's 3% Dividend Raises Questions on Investor Returns and Market Performance

The recent declaration of a 3% cash dividend by Siddhartha Systematic Investment Scheme (SSIS), an open-ended fund managed by Siddhartha Capital, for the recently concluded fiscal year has sent ripples through Nepal's investment community. This modest return has sparked considerable debate and disappointment among small investors, particularly when juxtaposed against commercial banks offering an average of 2.75% interest on standard savings accounts—a virtually risk-free investment.

The stark comparison between a market-linked investment, which inherently carries capital risk, and a secure bank deposit, where both principal and interest are guaranteed, raises critical questions about the efficiency of fund managers and the efficacy of their portfolio selection strategies. Investors are pondering why, despite attractive incentives such as exemption from capital gains tax, dividend tax relief, priority allocation in IPOs, and even exit fees for early withdrawals (within 24 months), the returns from such schemes are barely above, or in some cases, equivalent to, basic savings rates. This situation has intensified scrutiny on the performance expectations from other open-ended funds in the market.

Open-ended collective investment schemes and their Systematic Investment Plans (SIPs) have steadily gained traction in Nepal's capital market as a disciplined and long-term investment avenue for retail and small investors. Approved by the Securities Board of Nepal (SEBON), various capital management companies operate these funds. The journey began formally on Jestha 19, 2076 BS (June 2, 2019), with the launch of NIBL Sahabhagita Fund. Since then, the market has seen the emergence of over a dozen such schemes, including Siddhartha Systematic Investment Scheme, NMB Saral Bachat Fund-E, NIC Asia Dynamic Debt Fund, Nabil Flexi Cap Fund, Kumari Sunaulo Lagani Yojana, and Shubhalaxmi Kosh.

Unlike closed-ended funds, which have a fixed maturity period, open-ended funds offer investors the flexibility to buy and sell units at any time based on their Net Asset Value (NAV). These funds typically pool capital from numerous small investors and diversify it across a range of assets, including equities, debentures, and fixed deposits in banks and financial institutions, aiming to mitigate risk and generate stable returns.

Historically, open-ended funds in Nepal have demonstrated robust performance, delivering commendable dividends to their unit holders despite the inherent volatility of the Nepali stock market. For instance, NIBL Sahabhagita Fund distributed 8.25% in FY 2076/77, an impressive 50% in FY 2077/78 (a period of market peak), 7.2% in FY 2078/79, 4% in FY 2079/80, and 7% in FY 2081/82 (as per the article's data, likely referring to the most recent declaration for a past fiscal year). Other funds have also historically distributed dividends ranging from 7% to 16% in previous years. However, recent market sluggishness and variations in fund managers' investment strategies have led to less enthusiastic returns across the board.

Investment experts caution against evaluating SIPs and mutual funds solely on a single year's dividend. The core advantage of SIPs lies in rupee-cost averaging: investors purchase more units when the market is low and fewer when it's high, thereby reducing the average cost of investment over time. Historical data suggests that investors who consistently invested a minimum of NPR 1,000 monthly through SIPs for 3 to 5 years have typically achieved an average annual compounded return of 10% to 15%. While a short-term market downturn might lead to a decrease in a fund's NAV and a lower dividend rate, a market recovery can significantly boost both capital appreciation and overall returns.

For small investors, including students and those with modest incomes, SIPs remain an excellent tool for disciplined savings, with the flexibility to start with as little as NPR 1,000 per month. The option of dividend reinvestment further amplifies long-term compounded returns, allowing investors to purchase additional units with their dividends rather than taking cash. Furthermore, the liquidity offered by open-ended funds, allowing investors to redeem units at NAV whenever needed, adds another layer of convenience.

In the current economic climate, characterized by declining bank interest rates and persistent stock market volatility, investors are advised to look beyond mere annual dividend figures. A more holistic approach involves assessing a fund's improvement in Net Asset Value, its diversification strategy, and its long-term growth potential. Making informed decisions based on these broader metrics, rather than short-term returns, is crucial for navigating the dynamic landscape of the Nepali capital market.