Mutual Fund

Evolution of Mutual Funds, all beginning from 1963

What are Mutual Funds?

Mutual Funds are portfolios involving different kinds of securities like stocks, bonds and other short-term debt.

The portfolio manager analyses the risk and return of various securities and decides on how the investment is to be made.

It helps small and individual investors to have access to diversified, professionally managed portfolios at a low price.

In this process, there are three different entities involved.  They are:

  • The investor
  • Trustees
  • The asset management company

The three primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end funds.

The main types are stocks, bonds, short-term debts, or both stocks and bonds in the form of hybrid funds.

It offers a Systematic Investment Plan to the investors to invest in a disciplined manner.   It allows the investor to invest a particular amount of money at some previously agreed time intervals in the mutual fund scheme already selected.

Evolution of Mutual Funds Inception Phase (1963-87)

Unit Trust of India (UTI) was founded in 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and operated under the Regulatory and administrative control of the Reserve Bank of India.

UTI enjoyed a pool in the sector as it was the only entity to offer the services. It was later delinked from the RBI in the year 1978 and its regulatory & administrative control was taken charge by the Industrial Development Bank of India (IDBI).

Unit Scheme (1964) was the first scheme brought up by UTI. In the latter years, UTI innovated and offered various schemes for investment in mutual funds. Unit Linked Insurance Plan(ULIP) was one such scheme launched in 1971.

In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.

The first scheme originated by UTI was Unit Scheme 1964. At the end of 1988, UTI had assets under management for Rs. 6,700 crores.

When UTI was established several cycles ago, the idea was to not just introduce the concept of mutual funds in India; a connected idea was to set up a corpus for nation-building as well.

Therefore, to support the small Indian investor, the government built in many income-tax rebates in the UTI schemes.

UTI launched more schemes in the 70s and 80s to cater to the needs of different investors.

Public Sector Phase (1987-93)

1987 marked the approach of non-UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non-UTI Mutual Fund founded in June 1987 followed by Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India, Bank of Baroda Mutual Fund.

LIC founded its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

With the approach of public sector mutual funds set up by public sector banks, Life Insurance Corporation of India and General Insurance Corporation of India in 1987, the merger of UTI came to an end. SBI Mutual Fund was the first ‘non-UTI’ mutual fund.

Soon others followed – Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, LIC, Bank of India, GIC and Bank of Baroda Mutual Fund. At the end of 1993, the AUM of the sector was Rs47,004 crores.

This phase holds tremendous importance in the history of mutual funds as it also brought the industry under an orderly regulatory framework through The Securities and Exchange Board of India (SEBI).

It was founded in 1988 and is given statutory powers in 1992 through the SEBI Act to function as a self-governing body to protect investor interest, support the development of mutual funds and implement legislative measures.

Private Sector Phase (1993-96)

The private sector in India was permitted to join the mutual fund market in 1993. It has played an important role in the Mutual Funds history.

It provided investors with larger options for investment which subsequently led to increased competition with the existing public sector mutual funds.

Liberalization and deregulation of the Indian economy enabled many foreign fund companies to trade in India. Many of these operated through a joint venture with Indian promoters.

Till 1995, 11 private sector fund houses were set up to compete with existing ones. Since 1996, the growth of the mutual fund industry reached more further heights.

In the period between 1991-1996, the Government of India had understood the importance of the liberalization of the Indian economy.

Financial sector reforms were very much needed. India required private sector participation for the rebuilding of the economy.

With this in mind, the government gave up the mutual fund industry for the private players also. The foreign players embraced this move and joined the Indian market in vital numbers.

In this period, 11 private members –in collaboration with foreign entities- originated their Asset Management Funds.

Some of the top AMCs under the private sector were:

  • ICICI Prudential AMC
  • HDFC Mutual Fund
  • Kotak Mahindra Mutual Fund

AMFI, SEBI (1996-2003)

SEBI (Mutual Fund) Regulations in 1996 was introduced to set a uniform standard of norms for all the operating mutual funds.

Also, the Union Budget of 1999 took a huge decision of exempting all mutual fund dividends from income tax.

During this time, both SEBI and the Association of Mutual Funds of India (AMFI) launched an investor Awareness Program to instruct investors about investing in Mutual Funds.

AMFI & SEBI have set up a governance framework for Mutual Funds as well as those issuing these products.

Among both bodies, investor protection is taken care of as well as providing data services including NAV of Mutual Funds.

AMFI India through its website provides daily NAV of all funds and also historical mutual fund prices. The UTI act was repealed in 2003, stripping it of its special legal status as a trust according to the act of Parliament.

Instead, UTI adopted a similar structure as any other fund house in the country and is under SEBI’s (Mutual Fund) Regulations. The establishment of a uniform industry in mutual funds has made it easier for investors to trade with any fund house.

Consolidation and Growth (2004 till date)

In February 2003, the Unit Trust of India was divided into two separate organizations, which led to the repeal of the original UTI Act of 1963.

The two separated entities were the UTI Mutual Fund and the Particularized Undertaking of the Unit Trust of India.

Following this division of the former UTI and the occurrence of numerous mergers among different private sector entities, the mutual fund industry took a step towards the phase of consolidation.

After the global economic recession of 2009, the financial markets across the globe were at an all-time low and the Indian market was no exception to it.

The majority of investors who had put in their money during the peak time of the market had suffered great losses.

This severely shook the faith of investors in the MF products. The Indian Mutual Fund industry struggled to recover from these hardships and remodel itself over the next two years.

The situation toughened up more with SEBI abolishing the entry load and the lasting repercussions of the global economic crisis. This scenario is evident from the sluggish rise in the overall AUM of the Indian MF industry.