Mutual Fund Industry in India

The mutual fund industry has been around for over 6 decades now in India. Mutual funds were first introduced in the year 1963 with the formation of UTI (Unit Trust of India) with the backing of RBI and Indian Government. Since then, the mutual fund industry has come a long way. It has seen its up and downs but the growth in the mutual fund industry has reached new heights in the last decade. Today the AAUM (Average Assets Under Management) of the mutual fund industry in India stands at over INR 24,31,342 crore.  The industry has seen four and a half fold increase in the span of 10 years from INR 4.83 trillion to INR 22.04 trillion. (All figures are taken from the official website of AMFI 

– Association of Mutual Funds in India)

When the mutual fund industry started in the year 1963, the main objective was to give an opportunity to small-time investors to participate in market-related gains and wealth formation. The history of the mutual fund industry can be bifurcated into six different phases.

Phase I (1964-87): Growth Of UTI:

In the year 1963, through the act of parliament, UTI was established. UTI had a monopoly as it was the only entity that was offering mutual funds. Initially, UTI was started by RBI but later it was delinked from it. The first mutual fund scheme was launched in 1964. During the period in the 70’s and 80’s UTI started offering schemes that would suit investors of all classes.

Phase II (1987-93): Entry of Public Sector Funds:

In the year 1987, many public sector mutual funds made an entry in the market. Many public sector banks and institutions were allowed to launch mutual funds. On Nov 1987, SBI became the first bank to launch the first non-UTI mutual fund in India. This was followed by other public sector banks like PNB and Canara. The AIM increased from INR 6700 crores to nearly INR 47000 crores from the year 1987 to 1993. During this period, a lot of investors had gained confidence in best mutual funds and were investing in larger amounts.

Phase III (1993-96): Emergence of Private Funds:

In the year 1993, the private sector got the nod to establish mutual funds. This was a breakthrough moment in the mutual fund industry as the investor had a broader choice of options and there was healthy competition between the public and private sector funds. This also allowed foreign companies to make an entry in the Indian mutual fund industry but through a joint venture with Indian promoters. Through the private sector, new product innovation and investment management techniques were introduced in the mutual fund industry.

Phase IV (1996-99): Growth And SEBI Regulation:

With the private sector and foreign players entering the mutual fund industry, it witnessed a tremendous growth in the industry. Indian economy had become more liberal which helped introduce more competition and thrust to the growth of the mutual fund industry. The increasing growth of the mutual fund industry beckoned introduction of regulation and this is when SEBI (Security Exchange Board of India) regulations come into existence. During the budget of 1999, a big step of exempting all mutual fund dividends from income tax in the hands of investors was taken. It was also during this time AMFI launched awareness programme in the interest of the investors.

Phase V (1999-2004): Beginning of a Large and Uniform Industry:

From the year 1999, a beginning of a modern economic phase of the mutual fund industry has emerged in terms of growth. In 2003, UTI act was updated and UTI no longer had special legal status and it adopted the same structure of trust and AMC as any other mutual fund. UTI comes under SEBI guidelines like any other mutual fund in India. The uniformity in the mutual fund industry made it easy for investors and distributors. During 1999 and 2005, the size of AUM saw a growth from INR 68000 crore to INR 1,50,000 crore.

Phase VI (From 2004 Onwards): Consolidation and Growth:

Since 2004, mutual fund industry has grown from strength to strength. The merger between big mutual fund houses and more international players continue to enter the Indian mutual fund industry. The mutual fund has also seen a surge in investments due to the introduction of technology for ease of making investments and available investment tools like mutual fund calculators. There are various categories and types of mutual funds available in the market today.

ADVANTAGES OF MUTUAL FUNDS:

Diversification feature in the mutual fund mitigates the risk and improves the overall returns for the investor.

Mutual fund transaction cost is spread over a large pool of investors and hence, it comes down to nominal rates for the individual investor.

There are many options of different types of mutual fund schemes available in the market like equity, money market, balanced and hybrid. An investor can choose the best mutual fund scheme as per his/her investment objectives.

Types of Mutual funds are professionally managed by a fund manager and its team. It saves time and effort on part of investor and results in high returns than other investment types.

Mutual fund schemes offer flexibility and affordability in investment through SIP (Systematic Investment Scheme).

Mutual fund investments are easy to liquidate as trading of mutual fund units are done on regular basis.

Dividend returns on mutual funds are tax-free in the hands of the investor. This enhances the returns value of the mutual funds than other investments.

Mutual fund operations are well regulated and come under the guidelines of SEBI which regularly overlooks the operations of mutual fund houses.

STRUCTURE OF MUTUAL FUNDS IN INDIA:

The mutual fund operates through 4 tier structure of Sponsor, an asset management company, Board of Trustees, and a custodian.

Sponsor:

Sponsor is responsible for establishing the mutual fund. It may be an individual or corporate body. The sponsor of the mutual fund needs to compulsorily contribute at least 40% of the net worth of the AMC.

Board of Trustees:

The mutual fund house needs to have an independent board of trustees. The two-thirds of the trustees need to be totally independent and not associated with the Sponsor of the mutual fund. Trustees are responsible to protect the interest of the unit holders or investors of the mutual fund.

Asset Management Company:

The asset management company looks after the investing and administrative functions of the mutual fund. They have fund manager and analyst team of look after the daily trading of the investments. AMC charges a fee on the mutual fund for the services offered which is also known as an expense ratio of the fund.

Custodian:

As per the SEBI guidelines, the portfolio securities need to be guarded by a qualified bank custodian. The mutual fund house is required to have a registered custodian for their mutual fund securities.