Gopal Chitaure

NEPSE has seen an influx of new retail investors entering the market to make a quick profit as evidenced by an additional 1300, 000 DMAT registrations and higher trade volume. This outcome might be due to the combination of factors like liquidity owing to COVID-19, profits made by other investors and lower capital requirements in comparison to other investments such as real estate. Generally, novice investors are more likely to lose money in the stock market as they lack experiences and knowledge of companies, are misled by hype and rumours swirling in the stock market and sometime run out of patience. Many countries have financial instruments to prevent and reduce the risk of such losses. However, such financial safeguards do not exist in Nepal, forcing the new investors to incur loss.

Entry barrier
Let’s see how NEPSE is biased towards new investors. Firstly, there is the barrier of entry for commoners. The process of creating a brokerage account in Nepal is unnecessarily rigorous with a lengthy timeline and redundant requirements. It takes two days to open a bank account, two days to open a DEMAT account, and three days to open a broker account while making multiple trips to the banks and filling tens of forms for an average Nepali. This process costs three to four working days for an ordinary Nepali, and there are barely any private company that offers people three to four days leave - paid or unpaid - to open an investing account. While the system is shifting to online forms and things are improving compared to previous years, online processes are still slow and cumbersome.
Secondly, new investors are likely to have limited knowledge and experience in stock picking. The market seems to be bullish right now, and whenever the investors choose to invest in it, it goes up. However, the stock does not always soar. Peter Lynch, one of the greatest investors, said: “If you look at a stock and wonder if it can go any lower, it can go even lower.” Established investors may have securities such as bonds and commodities to hedge against the stock market loss but the new investors lack enough money to diversify their investment and a hedge against the loss.
Mutual funds may have been one option, but in today's Nepal, they seem to be more of a hindrance than an incentive. Mutual funds currently have a high expense ratio (fees taken by mutual funds range from 1 per cent to 3 per cent), with poor return. The higher expense ratio will hamper your gains. The mutual fund sub-index has done significantly worse than the NEPSE index over the last two years. While the mutual fund sub-index grew by 23.3 per cent in 2019, the NEPSE index grew by more than 67 per cent.
Another issue with purchasing a stock is that it can be prohibitively costly for ordinary people. What does happen if the cost of index funds rises to Rs. 20,000 while an individual can only invest Rs. 2,000 per month? They will have to wait ten months before they can invest. During this time, it would be ideal for the investors if the stock price drops. As the waiting period increases to manage the capital, it creates an opportunity cost for the investors.
Can we possibly repair the dysfunctional economic structure of NEPSE? Here are some suggestions to improve Nepal's stock market for new investors. As the transition to an online system in Nepal looks promising, there is still room for several improvements. Quicker approval of brokerage accounts like in the US and India could make the initial steps faster and more straightforward. Additionally, centralised collection and distribution of data to financial institutions can remove the need for filling out redundant forms. Such practical modifications to the current online system can remove initial entry barriers, encouraging more people to invest.
For a beginner, it is difficult to beat the market. A special mutual fund called a broad market index fund ($VOO in the US, $NIFTY in India) is one viable mechanism to avoid the risk for new investors. It's the same as investing in the whole stock market because it tracks the stock market's movement. It also outperforms existing mutual funds most of the time. It has a lower expense ratio of 0.25 to 0.75 per cent and is a relatively less risky investment. For ordinary Nepalis, this financial instrument would address a number of problems, including the barrier to entry due to lack of stock-picking knowledge and experience, and time for analysis.

Fractional shares
Another solution to one of the current issues is fractional shares, or the ability to buy a fraction of a share. This allows one to own as little as 0.001 per cent of the stock, and investors can purchase it at any time with any amount of money. As a result, this will smooth away the entry barrier for new investors with limited funds who choose to invest on a regular basis. The implementation of above recommendations is likely to solve the problems facing the new investors with little to no experience. These will provide insight them to bank on reliable companies, buy a fraction of stock with relatively little risk and spend their time on their preferred areas rather than sweat to research market.

(The author is a data-driven game designer and analyses companies for investment.)