Determinants of financial performance of Nepalese mutual funds: Evidence from fixed-effects panel analysis

Abstract

This study examines the determinants of financial performance: Net Asset Value (NAV), Net Profit and Dividend Payout Ratio (DPR) of Nepalese close end-mutual funds. This study is based on 988 fund-month observations of 26 registered funds over 38 months. The fixed-effects panel regression is used and the Hausman test indicates it is the better than the random effects and Pooled OLS. The results show that fund size has the most positive effect on all three performance measures (p < 0.01); operating expense has a negative effect on NAV and Net Profit (p < 0.05); but not on DPR; fund age is statistically insignificant; and trade amount has a positive effect on NAV and Net Profit (p < 0.01) but not on DPR. DPR is primarily driven by Net Profit and fund size. The fund-level policy was the major driver of DPR as shown by the multilevel variance decomposition where ICCs were 0.546 (NAV), 0.336 (Net Profit) and 0.760 (DPR). The fit of the model is satisfactory (R² = 0.521, 0.568 and 0.401, respectively; all p < 0.01). The practical contribution of the study is to provide the first causal, panel-based evidence on Nepalese mutual fund performance, thereby providing actionable guidance for investors (prefer large, low-expense, high-turnover funds), fund managers (cost control, active trading, transparent dividend policy) and regulators (minimum capital, expense caps, performance-based evaluation). Our findings also provide a replicable methodological template for studies of emerging market funds.