Institutional investors’ profit booking triggers NEPSE decline

KATHMANDU: The Nepal Stock Exchange (NEPSE) has experienced a persistent downturn as institutional investors, shifting funds from bank deposits to the stock market amid declining interest rates, booked profits and exited, market analysts report. The NEPSE index dropped 54.62 points on Sunday, reflecting the impact of this strategic withdrawal.

Institutional investors, particularly mutual funds, dominate Nepal’s secondary market. With bank interest rates falling, these funds ramped up stock investments in Falgun (February-March), driving a market upswing. However, since the third week of Falgun, the index has been on a steady decline. From a high of 2,890 points on Falgun 18, NEPSE slid to 2,616.26 by Chaitra 10, entering a bearish phase. Analysts attribute this to investors cashing out gains through short-selling strategies.

Trading volumes have also shrunk significantly. On Falgun 18, transactions hit NPR 14.25 billion with a 25.24-point rise, but the next day saw a 13.63-point drop despite NPR 14.29 billion in trades. By Sunday, daily turnover dwindled to NPR 6.32 billion alongside the 54.62-point decline, signaling reduced market activity.

Experts note that traders currently dominate the market, with mutual funds focusing on short-term profits rather than long-term stability. “Mutual funds prioritize unit holders’ interests and won’t act against them. But chasing performance over market conditions turns them into traders,” a broker explained. Typically, institutional investors are expected to balance market volatility, yet their profit-driven exits have left NEPSE unpredictable, analysts say.

Currently, 35 mutual funds—open and closed-ended—are listed on NEPSE. With interest rates at a three-year low and single-digit loan rates, banks are refusing large deposits due to cost pressures, limiting new investments. This has pushed mutual funds to the secondary market in recent months, though their focus on short-term gains has intensified volatility.

Despite the fluctuations, merchant bankers argue mutual funds are delivering strong returns. “While not universal, many funds offer good returns over their tenure. As long-term vehicles, they should be seen as investors, not just traders,” said Saugat Pant of Prabhu Capital. Data shows 35 funds actively seeking new investment avenues amid growing numbers.

The market last peaked in Sawan (July-August) but hasn’t recovered since, with institutional investors exiting before the downturn. “The rally in Asar wasn’t fundamentally sound. We predicted NEPSE wouldn’t cross 3,000 and exited between 2,800-2,900,” a merchant banker revealed. Following a mid-Asar political shift, NEPSE surged 46% in six weeks to 3,000 points, only to falter later.

Analysts suggest Nepal’s underdeveloped institutional investment landscape naturally leads to such trends. “Mutual funds invest based on fundamentals to stabilize volatility, but their recent behavior mirrors retail traders, profiting even in fluctuations,” an analyst noted. As the market grapples with these dynamics, NEPSE’s downward trajectory underscores the challenges of balancing profit motives with stability.