Mutual Fund Nepal: Read NAV, Expense Ratio and Tracking Error

A first mutual fund Nepal purchase usually starts the same way. Someone opens a returns table, compares two numbers, and picks the bigger one. That is not investing, it is number-shopping, and the documents that would let you do better are already published. What follows is a checklist for reading them before money moves, not a guide to which scheme to pick.

NAV is an accounting value, not a price

Net asset value is total assets minus total liabilities, divided by the number of units outstanding. NAV is a per-unit accounting value, worked out at some stated frequency and published after the fact.

One distinction first, because it trips people up. Most schemes sold in Nepal are open-end: you buy units from the fund and sell them back to it at that day's NAV, less any exit load the scheme document sets out. There is no market price to compare against NAV because there is no exchange trade. The premium and discount discussion below applies only to close-end schemes that are listed and traded on NEPSE. If you hold an open-end unit, your price is the NAV.

For a listed close-end fund, the market price is a different animal: whatever a buyer and a seller agree on that day. When that price sits above NAV, the fund trades at a premium. Below NAV, at a discount. The gap can stay open for a long while. It does not have to close on your schedule, and nothing in the structure promises it moves in a direction that suits you. What you can check is the size of the gap on the day you buy, and whether the fund's own documents explain how the NAV is struck.

How often NAV must be calculated and published is a rule rather than a habit, and rules get amended. Confirm the current requirement at the source before you treat any publication schedule as fixed. Nepal's securities regulator, SEBON, publishes at sebon.gov.np.

Expense ratio and tracking error, one line each

Expense ratio is the annual charge on a scheme, expressed as a percentage of its average net assets. Tracking error is the volatility of the gap between a fund's return and its benchmark's return.

Read the second one slowly, because it is the most misread number on any fact sheet. A low tracking error means the fund hugged its index. It does not mean the fund earned more. A scheme can track its benchmark beautifully and still sit below it after charges, year after year.

That is why the two belong in the same sentence. A low expense ratio is not a quality signal in itself, and a high one is not automatically disqualifying. What matters is what the charge buys. For an index fund, the charge is meant to buy replication, and tracking error tells you whether replication happened. For an actively managed scheme, the charge buys a manager's decisions, and you judge those against the stated benchmark and mandate, not against the fee alone.

What the difference looks like over ten years

Illustrative arithmetic, not a forecast. Rs 1,00,000 left alone for 10 years at 10% a year, compounding annually, comes to roughly Rs 2,59,400, or round about Rs 2,59,000. The same Rs 1,00,000 at 8.5% a year (10% less a 1.5% annual charge, deducted once a year and compounding on the net figure) comes to roughly Rs 2,26,100, or about Rs 2,26,000. The assumptions belong in the same breath as the numbers: a single lump sum, no further contributions, the charge taken annually rather than accrued daily, the return held constant in both scenarios, and no tax or exit load modelled. Change any one of those and the outcome shifts.

Checklist: what to look for on a fact sheet

A lot of NAV publishing in Nepal looks like a share price table: a name, a number, a change from yesterday. The calculation basis, the period covered, whether the figure is net of charges, all of that is often missing or buried deep enough that nobody scrolls to it. So open the fund's fact sheet or scheme document and walk down this list. You are not scoring the fund. You are working out whether the document lets you answer the questions at all, and one that leaves you guessing has told you something about its disclosure quality.

• Does it state the period covered? A return with no period attached is decoration.
• Is the benchmark named, and is it the same benchmark across the periods shown?
• Is the expense ratio disclosed, and for which period?
• Are portfolio holdings listed with weights and as-of dates, or only described in words?
• Are returns shown net of charges or gross, and is that stated plainly?
• Is the return series long enough to mean anything, or a few months dressed up as a track record?

Then ask the questions the sheet cannot answer. Systematic investment plans, where you contribute a fixed amount every month, are no longer unusual in Nepal. Several fund managers here run monthly SIP plans, and some schemes let you start with a fairly small instalment. What varies is the minimum amount, the collection dates, which schemes are eligible, and what happens when a payment fails. Read those terms in the scheme document and confirm the current instalment with the manager rather than assuming your bank's autopay will sort it out.

Tax is the other one. The treatment of units and of distributions depends on whichever Finance Act is in force, and rates can differ between individuals and institutions. There is no responsible way to quote a figure here without reading the current Act on the day you read it, so read it, or take advice from a professional who does this for a living.

How a fund gets authorised, in outline

A collective investment scheme is authorised by the securities regulator. The manager runs the portfolio, but the manager is not holding the assets alone: a separate depository holds the units and a fund supervisor oversees the arrangement. Before the scheme accepts subscriptions it has to publish a document setting out its objective, benchmark, charges and risks. The specific instrument governing all of that, and its latest amendment date, is something to confirm on sebon.gov.np rather than take from an article. Caps on charges, disclosure intervals and tax treatment all live in instruments that get revised. Check the date on whatever you read, this page included.

Educational only. Nothing here recommends any scheme, and no return is promised or implied.