Regulatory burden caps mutual fund growth despite strong track record
KATHMANDU, APRIL 21
Nepal's mutual fund industry has, over the past decade, established a performance record that merits serious consideration.Since Securities Board of Nepal (SEBON) formally brought in Mutual Fund Regulation 2067, around 55+ schemes have been launched. Out of these, fourteen have already matured while eleven outperformed the NEPSE index. The industry has grown from NPR 13.6 billion in AUM in 2019 to nearly NPR 73 billion by 2026, representing more than 5x growth in under seven years. Fund Performance in most cases have been exceptional as well. The best performing matured funds delivered annualised returns approaching 35%, with total dividends distributed over five-year periods reaching 100% of face value. Even during the prolonged bearish phase from FY 2021 to FY 2024, when fixed deposits rates approached to 10% and seemed more attractive, mutual funds held their ground as a structured and diversified investment option.
And yet, set that record alongside India's and the contrast is hard to ignore. India's mutual fund industry manages assets equivalent to 19% of its GDP. Nepal's mutual fund AUM, by comparison, represents just 1.2% of GDP and 1.5% of NEPSE's market capitalization as of March 2026. A significant part of that gap traces back to a single regulatory constraint. Nepal's current seed capital rule requires fund managers to commit 15% of a fund's total corpus, locking up NPR 10.96 billion across the industry's 56 active schemes. Had India's equivalent framework applied instead, the required seed capital would have been approximately NPR 280 million, roughly 40 times lower than what Nepali fund managers are currently required to invest. Put differently, the capital currently sitting as mandatory seed investment, if freed and redeployed under an India-equivalent framework, implies a potential industry size of approximately NPR 2.86 trillion, against today's NPR 73 billion. The scale of that difference points not to a failure of the market, but to the size of the opportunity that regulatory reform could realistically unlock.
A Maturing Market Calls for a Maturing Framework
Nepal's mutual fund market is governed by Mutual Fund Regulation 2067 and Mutual Fund Guidelines 2069. While these regulations were functional and were well-intentioned at inception, they now require an update to better align with the evolved and expanding market landscape.
The most consequential example has been seed capital. Up until January 2026, fund managers had to put in 15% of the fund's total AUM as seed capital. In theory, this seems reasonable, but in practice, it created pressure. One mid-sized Asset management Company (AMC), as per CARE Ratings Nepal's July 2024 analysis, had committed mandatory seed capital exceeding its entire paid-up capital base, a structural outcome that no regulation should be producing.
Three structural problems follow when seed capital is tied to ongoing AUM this way.
• Balance sheets are compressed, the capital that could have funded new scheme launches, research or talent is locked in mandatory contributions.
• Growth becomes disincentivised. The more investors trust a fund and the larger it grows, the heavier the AMC's mandatory commitment becomes.
• The third is a high barrier to new entry. For any fund manager without a large institutional parent, committing 15% of AUM from day one makes the business model capital-prohibitive before a single unit has been sold. Fewer entrants means less competition, less product diversity, and ultimately fewer choices for the retail investor the regulation was designed to protect.
SEBON's Revised Framework: A Meaningful Shift in the Right Direction
In January 2026, SEBON revised its seed capital requirement. The new tiered structure allows fund managers with three or more years of operating experience, AUM above NPR 1 billion, and Net Asset Value (NAV) consistently above face value to qualify for lower rate requirements of 5% or 10%. The 15% requirement continues to apply to newer entrants and smaller schemes; fund managers still in their early years of operation, those yet to cross the NPR 1 billion AUM threshold, or those whose NAV has not sustained above face value, ensuring that the confidence signal remains strongest where investor protection needs it most.
This decision rewards track record. It lowers the barriers for already established managers and also signals that SEBON is listening to industry feedback and responding to it.
Tiering the rate was a sensible step. The next step should focus on the basis of the obligation itself. Currently, the commitment remains tied to ongoing AUM rather than the initial fundraise. As a fund grows past NPR 1 billion, which the stronger funds inevitably will, the absolute rupee burden continues to expand.
A similar issue emerged in India over time. SEBI initially required 1% of NFO amount capped at INR 50 lakhs, and fixed at launch. They have since evolved to a range of 0.03-0.13% of Quarterly Average AUM, scaled by risk band. Each iteration addressed a specific gap left by the previous rule. Nepal now has the advantage of learning from that full arc.
What Our Neighbours Got Right
India's mutual fund industry didn't grow from roughly 6% of GDP in 2016 to 19% today by accident. That expansion came from deliberate, sequential policy choices.
Regulators made open-ended, SIP-enabled funds the default product. They revised the seed capital framework across multiple iterations, each targeting a specific gap left by the previous rule, until the obligation stopped penalising funds that grew too quickly. They introduced the Risk-o-Meter, which linked regulatory expectations to the actual risk profile of a scheme rather than applying the same standard across products of varying complexity.
Then in December 2024, the MF-Lite framework created a separate, lighter regulatory track for passive and index funds, requiring only INR 50 crore in minimum net worth. Each of these moves solved a specific problem. Together, they built an industry now widely expected to surpass India's GDP by 2047.
Pakistan and Sri Lanka are worth looking at more closely, not because they are obvious models, but precisely because they are not.
Pakistan's regulatory framework explicitly permits cross-border fund investment under government-to-government investment agreements, Mutual funds can invest up to 30% of AUM abroad with a cap of USD 15 million. This creates a real diversification option for retail investors and a regulated channel for diaspora capital.
Sri Lanka goes further, permitting international investment outright and offering full tax-free treatment on both income distributions and capital gains. Yet both have built rules that give their fund managers more room than Nepal's current framework provides.
Nepal is not starting from scratch. Its tax-exempt vehicle structure, meaning the fund itself pays no corporate income tax on its investment income or capital gains, with returns passed directly to investors without being taxed twice at the fund level is genuinely strong, arguably more competitive than India's baseline position. The 85% public subscription requirement for closed-end schemes offers meaningful protection for retail investors. And a decade of performance data is not a minor asset: eleven of fourteen matured funds have outperformed the NEPSE index, which gives SEBON something concrete to point to when making the case for reform.
The lesson from the region is not that Nepal needs to design an entirely new system from the ground up. It is that Nepal can move faster than its neighbors did, with the benefit of a roadmap its neighbours took years to write.
A Mutually Beneficial Agenda: Four Asks that Work for Everyone
Each one has a precedent, a peer, and a clear rationale, all grounded in sound regulatory principles.
I. Cap the seed capital compulsion in absolute terms. Instead of linking the seed capital endlessly to the AUM, introduce a monetary ceiling per scheme regardless of the fund size. This eliminates the growth penalty for the industry's most successful managers while preserving the confidence signal for the new entrants. In many ways, it is simply the completion of the reform that SEBON has already begun.
II. Build a better risk-based classification framework. A formal and more structured risk-rating, analogous to India's, would calibrate the regulatory obligations to actual risk profile rather than application of a uniform standard across all product types. This singular structural change could unlock multiple downstream reforms; differentiated seed capital requirements, an MF-lite pathway for passive products, and tiered disclosure rules.
III. Accelerate the shift towards open-ended funds. Thirteen of Nepal's 56 active schemes are open-ended, and the three largest funds in Nepal by AUM all sit in this category. Performance data reinforces this shift: open-ended fund AUM has grown from NPR 199 million across a single scheme in 2019 to over NPR 20 billion across 13 active schemes today. That is more than 100x growth in under seven years, a rate that reflects both the novelty of the starting point and the genuine depth of retail appetite for liquid, SIP-enabled products. A category that barely existed six years ago now accounts for nearly 30% of Nepal's active mutual fund market, placing SIP-enabled products among the fastest-growing segments of Nepal's capital market. Of the fourteen mutual fund schemes that have reached maturity, 11 have outperformed the NEPSE index over their full fund lives, delivering an average annual return of 15.76% against the NEPSE's comparable period returns, and well ahead of the average fixed deposit rate of 8.57% over the same period. Systematic, regular investing through SIPs is structurally designed to capture this kind of long-term performance. The shift is already underway and the market is driving it. Simplified approval processes for open-ended, SIP-enabled launches would simply accelerate what investors have already begun doing.
IV. Enable foreign investment pathways: Enabling a structured framework for prudently calibrated foreign allocation within mutual fund portfolios could, if thoughtfully designed in the future, enhance diversification, reduce concentration risk in domestic markets, and gradually align Nepal's investment practices with global portfolio standards.
The Arithmetic of What is Possible
Nepal's GDP stands at approximately NPR 6.1 trillion in FY 2024/25. At 5% MF AUM penetration, a threshold that our neighbour India achieved years ago, the industry would need roughly NPR 305 billion in assets. At 10%, that number rises to NPR 610 billion. That capital does not sit idle. It flows into businesses, infrastructure, and the broader economy that Nepal's development pipeline requires.
SEBON's January 2026 amendment is a well-calibrated first move in a positive direction. The four reforms outlined above would simply extend the trajectory SEBON has already begun. Each would produce mutually beneficial outcomes: better protection and opportunities for investors, including wider product choice, improved liquidity through open-ended formats, and access to returns that have historically outpaced fixed deposits, more viable business models for fund managers, and a capital market capable of playing a larger role in Nepal's economic growth.
The most difficult part: building trust, demonstrating returns, and establishing the regulatory foundation, has already been done. What follows next is growth.
A version of this article appears in the print on April 22, 2026, of The Himalayan Times.
