Systematic investment plans (SIPs) attracted growing interest among young investors in Nepal over the past few years. They offered a convenient way for people who lacked the knowledge, time or confidence to invest directly in the stock market to gain indirect exposure to equities.

But growing dissatisfaction with low returns in recent years has prompted many investors to criticise these schemes. Some have even stopped investing in them.

Bhupesh Timilsina, a member of the public, recently wrote on social media: “Putting money into an SIP feels no different from burying it in the ground and hoping it will grow. What was the point of launching these schemes if investors are now getting a paltry 5–6 percent return?”

As annualised returns have remained low, criticism has intensified. A fund manager overseeing such schemes said more investors had approached them before Tihar asking to discontinue their SIPs.

“Some were persuaded to stay after we explained how the schemes work, but others went ahead and closed their plans,” the manager said.

What is an SIP?

An SIP is a facility offered by open-ended mutual fund schemes that allows investors to purchase fund units regularly, usually every month, over a specified period. These schemes are not listed on the stock exchange and are therefore not traded on the Nepal Stock Exchange (Nepse). Investors can, however, buy or sell units through the offices of the merchant bankers managing the schemes or through forms available on their websites.

Mutual funds generally offer two types of schemes: open-ended and closed-ended. Closed-ended schemes are listed on the stock exchange and have a fixed maturity period. Open-ended schemes, by contrast, have no predetermined maturity date and remain available for transactions over many years.

An SIP is essentially a product that enables investors to make regular monthly purchases of units in an open-ended mutual fund over a specified investment period.

Fund managers often provide SIP calculators on their websites to help investors estimate how much their investments might be worth at the end of the chosen period. Investors can enter their intended investment period, monthly contribution, expected annual return and other details to generate a projection.

For example, someone investing Rs10,000 every month for 20 years would contribute a total of Rs2.4 million. If the investor assumes an annual return of 12 percent, an SIP calculator would project a final amount of Rs9.991 million. Of this, Rs7.591 million would represent estimated gains.

Such projections have led many investors to believe that their money will double or even multiply several times through SIPs. But stakeholders say not everyone understands that the returns shown by calculators are estimates, not guarantees.

They also point out that actual earnings depend not only on the returns generated by the fund but also on the price at which units are purchased each month. Since unit prices fluctuate, the cost of accumulating units over time varies.

There is no guarantee that these schemes will deliver a particular dividend or return. Mutual funds invest around 75 to 80 percent of the money collected through such schemes in the stock market, which is their main source of income. When market performance falls short of expectations, returns also suffer, prompting investor dissatisfaction.

Nepal currently has 14 open-ended mutual fund schemes offering SIP facilities. The returns from NMB SIP are examined here as an example.

Five years have passed since NMB Capital launched the NMB Saral Bachat Fund. An investor who started investing in the scheme from its launch would have made 61 monthly contributions by November 1.

With a monthly investment of Rs5,000 and the reinvestment of dividends, the investor would have accumulated 3,255 units. The average cost per unit would have been Rs9.17, while the total investment would have amounted to Rs305,000.

The fund’s current net asset value (NAV) stands at Rs10.48 per unit. Selling all the accumulated units at that price would fetch Rs348,515, representing a gain of 14.26 percent over the amount invested.

However, because the money was invested in instalments rather than in a single lump sum, the return cannot be accurately calculated simply by comparing the total investment with the current sale value. On an annualised basis, the return over the period works out at 5.26 percent.

In some cases, returns have been lower than bank deposit interest rates. Nevertheless, SIPs can still be useful for people who cannot invest directly in the stock market. Unlike fixed deposits, they also do not require investors to commit a large sum, such as Rs100,000 or more, at once.

“These schemes were introduced to mobilise small amounts of money. They are also intended to help people who cannot trade in the market themselves or do not have the time to do so,” said Deepesh Kumar Vaidya, chief executive officer of NMB Capital.

Given the risks associated with the stock market, returns from SIPs may not appear particularly high when compared with the broader market, he said. Even a strategy of investing a fixed amount every month in a portfolio tracking the Nepse index would have generated annual returns of around 6 percent over the past five years, he added.

Vaidya said the market downturn had also pushed down the NAV of these schemes and reduced earnings from their stock market investments. Returns could improve if the market recovers, he said.

Although existing policy provisions allow these schemes to invest in foreign markets as well, that option has not yet been opened up. Vaidya said access to overseas markets could help diversify investments and potentially improve returns.