Mandatory Stress Testing Introduced for Mutual Funds, Seed Capital Relief for Strong Performers

The Securities Board of Nepal (SEBON) has introduced stricter regulatory measures in the mutual fund sector by amending the Mutual Fund Regulation, 2067. Under the revised provisions of Rule 29(2), SEBON has made stress testing mandatory for all mutual fund schemes, marking a significant shift toward proactive risk management. The new provisions will come into effect from Magh 1, 2082 (mid-January 2026), aiming to strengthen the sector’s resilience against potential market shocks.

As per the new rules, every scheme manager must conduct semi-annual stress tests using an appropriate model to assess the fund’s ability to withstand adverse market conditions. The stress test reports must be discussed at both the fund supervisor level and the board of directors of the scheme manager. A consolidated report, including observations and future action plans, must then be submitted to SEBON within one month of the end of each semi-annual period. In addition, scheme managers are now required to formulate and implement a comprehensive risk management policy to enhance institutional governance.

While tightening risk controls, SEBON has also introduced flexibility in seed capital requirements to reward strong performance and experience. Previously, scheme managers were required to invest a fixed 15 percent seed capital when launching new schemes. Under the revised framework, this requirement can now be reduced to 5 percent or 10 percent based on the manager’s experience, assets under management, and past performance. Managers with at least five years of experience, over NPR 5 billion in managed funds, and an average NAV above par value over the past three years can launch new schemes with just 5 percent seed capital.

Similarly, managers with a minimum of three years of experience, more than NPR 1 billion in fund management, satisfactory ratings, and an average NAV above par are eligible for a reduced seed capital requirement of 10 percent. However, schemes launched under these concessional provisions will be capped at a maximum size of NPR 10 billion. New or underperforming managers who fail to meet these criteria will still be required to maintain the original 15 percent seed capital. Overall, SEBON’s latest move seeks to balance stricter risk oversight through mandatory stress testing with performance-based incentives, making Nepal’s mutual fund industry more professional, transparent, and investor-friendly.