History of Mutual Funds
By the end of 1988, UTI had total assets worth Rs 6,700 crore. Soon after, eight funds were established by banks, LIC and GIC between 1987 and 1993. The total number of schemes went up to 167 and total money invested – measured by Assets under Management (AUM) – shot up to over Rs 61,000 crore.
In 1993, private and foreign players entered the industry, marking the third phase. The first entrant was Kothari Pioneer Mutual fund, which launched in association with a foreign fund.
The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund Regulation in 1996, which, for the first time, established a comprehensive regulatory framework for the mutual fund industry. Since then, several mutual funds have been set up by the private and joint sectors.
Currently there are around 45 mutual fund organizations in India together handling assets worth nearly Rs 10 lakh crore. Today, the Indian mutual fund industry has opened up many exciting investment opportunities for investors. As a result, we have started witnessing the phenomenon of savings now being entrusted to the funds rather than in banks alone. Mutual Funds are now perhaps one of the most sought-after investment options for most investors.
As financial markets become more sophisticated and complex, investors need a financial intermediary who can provide the required knowledge and professional expertise on taking informed decisions. Mutual funds act as this intermediary.
Reasons of why mutual funds are formed
- For an ordinary person, who knows not much about markets, about investing, it’s very difficult to manage money. He wouldn’t know how to track a stock, or how to value it? So, for these people, a simple way is just to give their money to someone else who can manage it properly and help you in growing it. But, you cannot give all your life’s saving just to anyone. What if the person you gave money ran away with it?? That’s why mutual funds are set up, so that you can put your money into funds and they will manage it. Since, Fund is managed by AMC, and AMCs are monitored by trusts, your money is safe. Plus these fund managers are intelligent, a keep track of markets and stuffs, they are very much qualified to manage money.
- Another reason is to take advantage of scale and diversity. Suppose you only have Rs. 2,000 with you, and you want to invest it into a stock, which costs around Rs 4,000? You just cannot buy a half stock, and you don’t have enough money to buy a single share. Or you want to diversify your portfolio to reduce market risk, but you cannot buy 10 different stocks with your small amount. So what will you do? You put your money into a Fund, similar to you, other people also give their money to the fund, and now fund will have enough money and it can buy any stock it wants. It can also diversify it across multiple stocks to reduce its risk.
Mutual Fund Management Structure
The mutual fund sponsor, either an individual, group of individuals or corporate body, is responsible for applying for registry with SEBI. Once approved, the sponsor must form a trust to hold the assets of the fund, appoint a board of trustees or trust company, and choose an asset management company.
The board of trustees or trust company is responsible for overseeing the mutual fund and ensuring it operates with the best interests of its shareholders in mind. The asset management company is the entity in charge of managing the fund’s portfolio and communicating with shareholders. If the asset manager wishes to expand the product line, introduce a new scheme or change an existing one, it must first obtain approval from the board of trustees or trust company.
In addition, the trustees must appoint a custodian and depository participant who are responsible for keeping track of asset trading activity and safeguarding both the tangible and intangible assets of the fund.
The Mutual Fund Industry in India
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India (UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The objective then was to attract small investors and introduce them to market investments. Since then, the history of mutual funds in India can be broadly divided into six distinct phases.
Phase I (1964-87): Growth Of UTI
In 1963, UTI was established by an Act of Parliament. As it was the only entity offering mutual funds in India, it had a monopoly. Operationally, UTI was set up by the Reserve Bank of India (RBI), but was later delinked from the RBI. The first scheme, and for long one of the largest launched by UTI, was Unit Scheme 1964.
Later in the 1970s and 80s, UTI started innovating and offering different schemes to suit the needs of different classes of investors. Unit Linked Insurance Plan (ULIP) was launched in 1971. The first Indian offshore fund, India Fund was launched in August 1986. In absolute terms, the investible funds corpus of UTI was about Rs 600 crores in 1984. By 1987-88, the assets under management (AUM) of UTI had grown 10 times to Rs 6,700 crores.
Phase II (1987-93): Entry of Public Sector Funds
The year 1987 marked the entry of other public sector mutual funds. With the opening up of the economy, many public sector banks and institutions were allowed to establish mutual funds. The State Bank of India established the first non-UTI Mutual Fund, SBI Mutual Fund in November 1987. This was followed by Canbank Mutual Fund,LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. From 1987-88 to 1992-93, the AUM increased from Rs 6,700 crores to Rs 47,004 crores, nearly seven times. During this period, investors showed a marked interest in mutual funds, allocating a larger part of their savings to investments in the funds.
Phase III (1993-96): Emergence of Private Funds
A new era in the mutual fund industry began in 1993 with the permission granted for the entry of private sector funds. This gave the Indian investors a broader choice of ‘fund families’ and increasing competition to the existing public sector funds. Quite significantly foreign fund management companies were also allowed to operate mutual funds, most of them coming into India through their joint ventures with Indian promoters.
The private funds have brought in with them latest product innovations, investment management techniques and investor-servicing technologies. During the year 1993-94, five private sector fund houses launched their schemes followed by six others in 1994-95.
Phase IV (1996-99): Growth and SEBI Regulation
Since 1996, the mutual fund industry scaled newer heights in terms of mobilization of funds and number of players. Deregulation and liberalization of the Indian economy had introduced competition and provided impetus to the growth of the industry.
A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform standards for all funds. Erstwhile UTI voluntarily adopted SEBI guidelines for its new schemes. Similarly, the budget of the Union government in 1999 took a big step in exempting all mutual fund dividends from income tax in the hands of the investors. During this phase, both SEBI and Association of Mutual Funds of India (AMFI) launched Investor Awareness Programme aimed at educating the investors about investing through MFs.
Phase V (1999-2004): Emergence of a Large and Uniform Industry
The year 1999 marked the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amount mobilized from investors and assets under management. In February 2003, the UTI Act was repealed. UTI no longer has a special legal status as a trust established by an act of Parliament. Instead it has adopted the same structure as any other fund in India – a trust and an AMC.
UTI Mutual Fund is the present name of the erstwhile Unit Trust of India (UTI). While UTI functioned under a separate law of the Indian Parliament earlier, UTI Mutual Fund is now under the SEBI’s (Mutual Funds) Regulations, 1996 like all other mutual funds in India.
The emergence of a uniform industry with the same structure, operations and regulations make it easier for distributors and investors to deal with any fund house. Between 1999 and 2005 the size of the industry has doubled in terms of AUM which have gone from above Rs 68,000 crores to over Rs 1, 50,000 crores.
Phase VI (From 2004 Onwards): Consolidation and Growth
The industry has lately witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of schemes of Allianz Mutual Fund by Birla Sun Life, PNB Mutual Fund by Principal, among others. At the same time, more international players continue to enter India including Fidelity, one of the largest funds in the world.