Mutual Funds ramp up equity exposure despite weak NEPSE, NAV pressure mounts as market stalls

KATHMANDU: Nepal’s mutual fund industry has increased its exposure to equities in recent weeks, even as the secondary market remains largely stagnant—triggering valuation pressure and mixed performance across fund portfolios.

According to the latest financial disclosures, a total of 56 open-ended and closed-end mutual funds have collectively invested Rs 65.13 billion in the stock market as of the end of Chaitra in FY 2082/83. This marks a 3.32 percent increase—equivalent to an additional Rs 2.09 billion—compared to the previous month.

The investment shift comes amid a sharp decline in interest rates, which has eroded returns from traditional fixed-income instruments, particularly bank fixed deposits.

Rate Collapse Forces Strategic Reallocation

With commercial bank fixed deposit rates falling below 2 percent, most mutual funds have aggressively rebalanced their portfolios away from low-yield instruments toward equities. Data shows that 48 mutual funds have reduced their exposure to term deposits to zero, underscoring a systemic shift in asset allocation strategy.

Only eight funds currently maintain exposure to fixed deposits, totaling Rs 703.9 million—a 3.19 percent decline from the previous month.

“This is not a bullish bet—it’s a forced allocation,” said a merchant banker, pointing to the absence of viable low-risk alternatives in the current monetary environment.

Equity Investments Rise, But Returns Lag

Out of the 56 funds, 35 increased their stock market exposure during the review period. Notably, Citizens Balanced Fund posted the highest increase, expanding its equity investment by 90.94 percent to Rs 775.4 million from Rs 406.1 million a month earlier.

Meanwhile, NIBL Ace Capital-managed participation fund remains the largest equity investor among mutual funds, with total stock market exposure reaching Rs 8.18 billion.

However, despite the increased allocation, funds are struggling to generate meaningful returns. Market analysts say the lack of upward momentum in the NEPSE Index is limiting capital gains and dividend yields.

NEPSE Stagnation Undermines Fund Performance

The benchmark NEPSE index has failed to sustain post-election momentum. After peaking at around 2,960 points following the parliamentary elections, the index dropped to 2,676 and is currently hovering near 2,770—reflecting a prolonged consolidation phase.

Despite the formation of a new government with a near two-thirds majority, investor sentiment remains cautious, with limited policy signals to drive a sustained market rally.

This stagnation has directly impacted mutual fund performance. As of Chaitra, 33 funds reported a decline in Net Asset Value (NAV), while only 23 managed to post gains—indicating broad-based pressure across portfolios.

Liquidity Position Weakens

Mutual funds’ cash holdings have also declined, suggesting increased deployment into risk assets. Bank balances stood at Rs 10.94 billion by the end of Chaitra, down 3.66 percent from Rs 11.35 billion in the previous month.

The decline in liquidity buffers raises concerns about funds’ ability to respond to market volatility or meet redemption pressures, particularly for open-ended schemes.

Structural Risk: Rising Exposure, Weak Market Signals

The current scenario reflects a structural dilemma: mutual funds are increasing equity exposure not necessarily due to strong market fundamentals, but due to a lack of alternative investment avenues.

While lower interest rates typically support equity valuations, the absence of earnings growth, policy clarity, and investor confidence has capped upside potential in Nepal’s stock market.

Industry insiders say most fund managers are now in a “wait-and-watch” mode, cautiously deploying capital while monitoring macroeconomic signals, government policy direction, and liquidity trends.

Unless the NEPSE index breaks out of its current range or new fiscal and monetary stimuli are introduced, mutual funds may continue to face NAV volatility and subdued returns despite higher market exposure.

The coming quarter will be critical in determining whether Nepal’s mutual fund industry can convert increased risk-taking into sustainable returns—or face deeper valuation corrections in an underperforming market.