History of Mutual Funds in India
Mutual funds’ popularity has grown as a result of the greater returns they have recently provided. However, it is fascinating to learn how it all began. The article takes you on a fascinating tour through the world of mutual funds in India
Mutual funds are becoming increasingly popular among regular investors. This was not the situation even a decade ago. However, demonetisation and the pandemic might be viewed as catalysts for increased interest among retail investors. However, it would be intriguing to learn how it all began and how the mutual fund industry evolved through time. In this article, we will walk you through the mutual funds’ journey in India. Mutual funds have a long history, dating back to 1963. The first mutual fund institution was the Unit Trust of India (UTI).
It is a collaborative endeavour of the Reserve Bank of India (RBI) and the Government of India. The goal of UTI was to let small, inexperienced investors to invest in larger companies’ shares and other financial instruments. UTI had a monopoly in the nation at the time. For many years, the 1964 Unit Scheme was the first mutual fund product accessible. The history of mutual funds in India is divided into five separate stages, which we will cover in the following paragraphs.
Phase of Inception (1964 – 1987)
The establishment of the UTI signified the beginning of the first phase. Despite the fact that it was a partnership between the RBI and the Indian government, the latter was quickly detached from the day-to-day activities of the Unit Trust of India. The company was the lone operator in the Indian mutual fund industry at the time. The Unit Linked Insurance Plan, or ULIP, was introduced by UTI in 1971. From that year till 1986, UTI launched various plans and was instrumental in popularising the concept of mutual funds in India.
When UTI was founded many years ago, the intention was not only to introduce the concept of mutual funds in India, but also to establish a corpus for nation-building. As a result, the government included many Income Tax concessions in the UTI schemes to entice small Indian investors. Unsurprisingly, UTI’s investable capital grew from ₹600 crore in 1984 to ₹6,700 crore in 1988. Clearly, the moment had arrived for the Indian mutual industry to progress.
Entry of Public Sector (1987 – 1993)
The mutual fund industry had developed its own character by the end of 1988. Since 1987, various public sector banks had been urging the government to establish their own mutual fund divisions. The State Bank of India established the first non-UTI asset management fund in November 1987. Other AMCs were swiftly established by institutions such as Canara Bank, Indian Bank, Life Insurance Corporation, General Insurance Corporation and Punjab National Bank.
This liberalisation of the mutual fund industry had the anticipated consequences. In 1993, the total corpus of all AMCs reached a stunning ₹44,000 crore. According to experts, the second phase not only extended the sector’s base but also encouraged individuals to invest a greater proportion of their resources in mutual funds. The mutual fund industry in India was clearly positioned for further expansion.
Entry of Private Sector (1993 – 2003)
The Indian government recognised the need for economic liberalisation between 1991 and 2003. Financial sector changes were urgently required. India required private sector cooperation to rebuild the economy. With this in mind, the government also opened up the mutual fund sector to private companies. Foreign players embraced the initiative and poured into the Indian market in large numbers. During this time, 11 private players formed asset management funds in conjunction with overseas’ businesses.
Some of the most prominent AMCs in the private sector are:
■ICICI Prudential AMC: This company is a collaboration between ICICI Bank of India and Prudential Plc of the United Kingdom. As of September 2022, it manages an average corpus of ₹4.85 lakh crore and has a portfolio of more than 120 plans.
â– HDFC Mutual Fund: This company was founded in the 1990s and manages over 70 distinct types of funds.
â– Kotak Mahindra Mutual Fund: As of September 2022, this AMC’s average asset base was more than ₹2.76 lakh crore. It is a collaborative venture between Kotak Financial Services and the Mahindra Group.
SEBI Interventions, Growth and AMFI
As the mutual fund industry expanded further in the 1990s,AMCs and the government decided it was time for some regulation and oversight. Investors needed to be safeguarded, and a level playing field needed to be established. A few years before, the Indian industry had suffered greatly as a result of bank frauds and there was a genuine risk that investors might lose their money once more. As a result, the government enacted the Securities and Exchange Board of India (SEBI) Regulation Act in 1996 which established a set of fair and transparent standards for all players. The Indian government stated in 1999 that all mutual fund profits would be tax-free. The decision was made to stimulate future expansion in the mutual fund sector. In the meanwhile, the mutual fund industry recognised the value of self-regulation. As a result, the Association of Mutual Funds in India (AMFI) was formed. Investor education is one of the organisation’s objectives.
Phase of Consolidation (February 2003 – April 2014)
Following the revocation of the original UTI Act of 1963, the Unit Trust of India was separated into two independent organisations in February 2003. The UTI Mutual Fund (which is subject to SEBI regulations for mutual funds) and the Specified Undertaking of the Unit Trust of India (SUUTI) were the two independent companies. Following the dissolution of the erstwhile UTI and the occurrence of several mergers among various private sector firms, the mutual fund industry entered a phase of consolidation.
Following the global economic recession of 2009, financial markets throughout the world were at an all-time low, and the Indian market was no exception. The majority of investors who parked their money during the market’s peak experienced significant losses. This seriously undermined investors’ trust in mutual fund products. Over the next two years, the Indian mutual fund sector tried to recover from these setbacks and reinvent itself. With SEBI removing the entry load and the long-term effects of the global economic crisis, the situation became much more difficult. This picture is supported by the slow increase in the aggregate AUM of the Indian mutual fund industry.
Steady Development and Growth
Recognising the paucity of mutual fund penetration in India, particularly in Tier II and Tier III towns, SEBI introduced a slew of progressive steps in September 2012. The goal of these initiatives was to increase transparency and security in the interests of stakeholders. This was SEBI’s initiative to ‘reenergise’ the Indian MF industry and increase the total mutual fund penetration in India. The initiatives eventually paid off by reversing the downward trend caused by the global financial crisis. After the new administration took control at the centre, the situation improved significantly. Since May 2014, the Indian mutual fund sector has seen sustained inflows and growth in both total AUM and total number of investor accounts.
Currently, all asset management companies in India handle assets of around ₹39.5 lakh crore. Though this figure appears appealing, we still have a long way to go before we can compete with the West. It is believed that Indians save between ₹20-30 lakh crore every year. The Indian mutual fund business has enormous potential if Indians began to invest a larger portion of their wealth in mutual funds. According to experts, Indians have begun to move a portion of their wealth from physical assets such as gold and land to financial instruments such as equities, bonds, ETFs, etc. However, the AMFI and the government must do more to encourage Indians to participate in mutual funds.
Conclusion
The Indian mutual fund sector began in 1963 with the establishment of the Unit Trust of India. This industry has developed over time from a UTI-dominated one to one with equal involvement from the public and private sectors. In comparison to worldwide standards, the Indian mutual fund industry is still rather modest. This sector has the potential to develop exponentially with more support from the AMFI and the government.