History of Indian Mutual Fund Industry

With the emergence of diverse productive avenues for investing, mutual funds have become one of the most popular investment options. A mutual fund is a simple investment product structured around the concept of risk mitigation by spreading investments in multiple channels. According to Nielsen global survey of investment attitudes, mutual funds is one of the favourite investment options that ranked atop among the other assets like precious metals, stocks and bonds.

In this article, we will look at the history of the mutual fund industry which grew fairly successfully and helped large number of investors generate wealth over the years.

Entry of mutual funds in India (1963)
The concept of mutual funds emerged in India in 1963 by the formation of Unit Trust of India (UTI) which is a watermark in annals of mutual fund industry in India. Mutual funds were initiated by government and the Reserve Bank of India (RBI), with an aim to attract small investors and were focused mainly on investing for creating wealth in the long run.

Monopoly era by UTI (1964-1987)
Established through an Act of parliament in 1963, the Unit Trust of India (UTI) enjoyed monopoly status for 23 years and functioned under the regulation of RBI for a period of 15 years. Later, it was de-linked from RBI in 1978 and functioned under the regulation of Industrial Development Bank of India (IDBI) which took over the administrative control in place of RBI. The first unit scheme of UTI was launched in 1964 and later more innovative schemes were launched in 1970’s and 1980’s to attract and suit the needs of Indian retail investors. By the end of 1987, the Assets Under Management (AUM) of UTI increased by ten times to Rs 6700 crore.

Entry of Public Sector Players (1987)
Public sector mutual fund players entered in the market in 1987. SBI mutual fund was the first non-UTI mutual fund in India. It has been successfully managing large investor’s funds since 1988. It launched many schemes to provide investors with opportunities for making profits in a diversified basket of stocks of Indian companies.

Later, such schemes were launched by Canbank mutual fund in (1987), Life Insurance Corporation (LIC) in (1989), Punjab Mutual Fund (Punjab National Bank) in (1989), Bank of India in (1990), General Insurance Corporation (GIC) in (1990). By the close of 1993, the AUM of mutual fund industry had increased seven times and had Rs 47,004 crore of assets under management. However, the UTI retained its position as the dominant player with 80% market share.

Entry of Private Sector Players (1993)
To provide a wider choice of funds to Indian investors, private sector players along with foreign mutual fund companies were permitted to enter into the mutual fund industry in 1993. In the same year, the first mutual fund regulation was passed, saying all mutual fund companies except UTI need to be registered and governed. In 1993, the erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund company in India. During 1994-95, 11 private sector funds have launched their schemes introducing innovative investment strategies.

SEBI – Mutual Funds Regulation (1996)
The mutual fund industry witnessed a sea change in the 1990s. In 1993, the mutual fund industry started functioning under the regulation of Securities and Exchange Board of India (SEBI). This is, probably, the most elaborate regulatory effort in the history of mutual fund industry of India. Consequently, there was a spurt in the number of mutual fund houses with many foreign players setting up funds in India. By the end of 2003, there were 33 mutual fund companies with total AUM of Rs 1,21,805 crore. The largest mutual fund UTI had Rs 44,541 crore of AUM in the same year.

In 2003, UTI was disaggregated into two entities. One is the Unit Trust of India with AUM of Rs 29,835 crore (as on Jan 2003). This has been functioning under an administrator and under the rules framed by Government of India. This does not come under the purview of the Mutual Fund Regulations.

And the second one is UTI Mutual Fund Ltd, sponsored by State Bank of India, Punjab National Bank, Bank of Baroda and LIC of India. This is registered with SEBI and functions as per mutual fund regulations. Currently Unit Trust of India works under the name UTI mutual fund and some of its earlier schemes were gradually wound up. However, UTI mutual fund is the largest player in the mutual fund industry.

As Indian mutual fund industry experienced major growth, simultaneously international mutual funds like Fidelity, Franklin Templeton Mutual Fund, etc. entered Indian market. There are 44 mutual fund players in the market until March 2012. The mutual fund industry has AUM of Rs 6.92 lakh crore as on June 2012.