Mutual fund investment in Nepal and its dual analysis of economic impact and investor behavior

This study examines the economic impact of mutual fund investment in Nepal by integrating micro-level investor behavior with macro-level outcomes. A mixed-methods strategy has been employed, integrating a primary survey of 394 mutual fund investors in the capital cities of Kathmandu, Pokhara, and Biratnagar with secondary time-series data from 2013 to 2023. Structural Equation Modeling (SEM) with Confirmatory Factor Analysis (CFA) is used to measure latent constructs. The study employs Vector Error Correction Modeling (VECM) and Granger Causality verification to investigate the long-term and short-term correlations between mutual fund and GDP growth. The result of the study is that mutual fund investors are predominantly young (51.02%), educated (47.46% bachelor’s), and privately employed (55.84%). The SEM with Confirmatory Factor Analysis (CFA) verified that information availability, risk tolerance, and financial literacy are important factors in investment choices (factor loadings: 0.70–0.80, p < 0.001). The VECM found a long-run cointegrating relationship between mutual funds and GDP, but no strong short-run Granger causality. Mutual funds have positive impacts on stock market performance and moderation of inflation, yet they do not have considerable impacts on employment in the long run. This paper is one of the first research studies to interconnect behavioral finance and financial development theory in the Nepalese context. Methodologically, the research moves forward by using SEM-CFA for microanalysis and linking it to VECM for macro outcomes. This provides a replicable path for emerging markets.