History of Mutual Funds in India

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A mutual fund is a pool of money collected from investors with a common goal. The company invests this pool of money in several financial instruments such as bonds, stocks, etc. This company is the Asset Management Company (AMC), managing all investments. It aims to maximise returns while keeping the risk at a minimum level. However, it is mandatory for the AMC to be registered with SEBI, which regulates all security investments. But how did a mutual fund start? In this article, we will cover the history of mutual funds.

Mutual Funds History

The history of mutual funds started way back in 1963. The Unit Trust of India (UTI) was the first company to start mutual funds. It is a joint initiative between the Reserve Bank of India (RBI) and the Government of India. The objective of UTI was to let small, uninformed investors invest in equity and other financial instruments of larger companies. Back then, UTI had a monopoly in the country. The 1964 Unit Scheme was the first mutual fund product available for several years.

The history of mutual funds in India has five distinct stages as follows –

1st Phase (1964 – 1987)

The mutual fund industry started with the Unit Trust of India (UTI) formation in 1963 by the Parliament Act. It functioned under the regulatory and administrative control of the Reserve Bank of India (RBI). Also, Unit Scheme 1964 was the first scheme launched by UTI. Later on, UTI was delinked from RBI in 1978. Industrial Development Bank of India (IDBI) took over the administrative and regulatory control in place of RBI. By the end of the year 1988, UTI had Rs.6700 crores assets under management (AUM).

2nd Phase (1987 – 1993)

The second phase of mutual fund history marked the entry of public sector banks. In 1987, public sector mutual funds were set up by public sector banks, Life Insurance Corporation of India (LIC) and Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-UTI MF started in June 1987. Subsequently, Canara Bank came into existence as Canara Bank Mutual Fund in December 1987. Similarly, some other bank’s mutual funds came into existence, such as –

Punjab National Bank Mutual Fund in August 1989
Indian Bank Mutual Fund in November 1989
Bank of India Mutual Fund in June 1990
Baroda Mutual Fund in October 1992
LIC Mutual Fund in June 1989
GIC Mutual Fund in December 1990

By the end of 1993, the total asset under management of the mutual fund industry was Rs.47,007 crores.

During the second phase, the observers claim that the second stage was not only the foundation for industry expansion but also encouraged investors to invest more savings in mutual funds. As a result, the mutual fund industry in India was poised for higher growth.

3rd Phase (1993 – 2003)

The new era of the mutual fund industry began with the introduction of private sector funds in 1993. This gave investors a wide choice of funds.

With the establishment of SEBI in April 1992, the Indian Securities Market gained importance. Also, in 1993, the first set of SEBI Mutual Fund regulations came into existence for all mutual funds except UTI. All the mutual funds were governed and regulated under SEBI. The purpose was to protect the investors’ interest.

The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund was the first private sector mutual fund company registered in July 1993. This was the first private sector mutual fund. Later in 1996, the SEBI regulations were replaced and revised with more comprehensive rules. Therefore, the mutual fund industry currently functions under SEBI Regulations 1996.

Over the years, the number of mutual funds increased, with many foreign sponsors setting up a mutual fund in India. Also, the MF industry witnessed numerous mergers and acquisitions during this phase. By the end of January 2003, there were 33 mutual funds with total assets of Rs.1,21,805 crores, out of which UTI alone had an AUM of Rs.44,541 crores.

4th Phase (February 2003 – April 2014)

In February 2003, UTI was divided into two distinct organisations following the abolishment of the Unit Trust of India Act 1963.

The first is the Specified Undertaking of Unit Trust of India (SUUTI), which operates under an administrator and regulations set by the Indian government. It does not fall under the authority of Mutual Fund Regulations.
The second is the UTI Mutual fund carved out of Unit Trust of India, which functions under SEBI MF regulations from February 1, 2003.

After the global economic recession in 2009, the global financial markets were at an all-time low, and so was India. The majority of investors who put their money when markets were at their peak suffered huge losses. The faith of investors in MF was severely shaken. The Indian mutual fund industry struggled to recover from these hardships and remodel itself for over two years. Also, the situation got more worse with SEBI abolishing entry load and repercussions of the global economic crisis. This scenario is evident from the sluggish growth in the overall AUM of the Indian mutual fund industry.

Existing Growth of Mutual Funds (Since May 2014)

Recognising the lack of penetration of mutual funds in India, especially in Tier II and Tier III cities, SEBI introduced several progressive measures in September 2012. The purpose behind these measures was to bring more transparency and security for the interest of various stakeholders. Also, SEBI’s idea was to ‘re-energise’ the Indian mutual fund industry and boost the overall penetration of mutual funds.

During the course, measures were taken to counter the negative trend because of the global financial crisis. However, the situation improved significantly after the new government was formed at the centre.

Facts of Mutual Fund Industry Growth

Since May 2014, the Indian MF industry has experienced a steady inflow and rise in AUM as well as a total number of investor accounts (folios).
The MF industry AUM crossed a milestone of Rs.10 lakh crore for the first time by 31st May 2014. By August 2017, the AUM increased twice and crossed Rs.20 lakh crore for the first time. Finally, by November 2020, the AUM crossed Rs.30 lakh crore.
From June 2012 to June 2022, the overall MF industry size has grown from Rs.6.89 lakh crores to Rs.35.54 lakh crores.
From June 2017 to June 2022, in a span of five years, the MF industry has grown two times.
The number of investor folios has gone up from 5.82 crores to 13.47 crores from June 2017 to June 2022.
The MF distributors also have played a significant role in popularising the SIP plans. In April 2016, the total number of SIP accounts crossed the one crore mark. As of June 2022, the total number of SIP accounts is 5.55 crore.

The growth in the MF industry has been possible because of the twin effects of regulatory measures taken by SEBI to re-energise the industry in September 2012. Also, the support from mutual fund distributors in expanding the retail base helped this expansion. Furthermore, these distributors connect with investors in smaller towns. They not only help investors to stay invested during the market volatility but also let them experience the benefits of investing in mutual funds.

Future of Mutual Funds

The MF industry AUM has been increasing, and we still have a long way to go. It is estimated that Indians save Rs.20-30 lakh crore (approximately) annually. This industry has the potential to grow further if Indians start saving a higher percentage towards mutual funds. Moreover, observers say that many Indians have started shifting a part of their savings from physical assets (gold, land) to financial instruments like equities, bonds, ETFs etc.

SEBI has come up with various initiatives for investor awareness and trying to expand its reach beyond top cities. With increasing income, population urbanisation, digitalisation and a better connectivity mutual fund industry have a bright future. Also, the MF industry can grow multi-fold with more encouragement from AMFI and the government.

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