Evolution of Mutual Funds in India

Mutual Funds are vehicles to mobilize money from multiple retail investors and invest the money pooled in various types of securities. The profit earned by these funds gives the investors the benefit of growth, wealth creation, stability, regular income, liquidity, or a mix of all.

Mutual funds are not only providing growth to the capital market through channelization of savings of retail investors but also playing an active role as active investors in Indian companies in the secondary as well as primary markets. By investing in a mutual fund, an investor gets access to markets that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company.

Evolution of mutual funds in India:

The objective of the mutual fund based on the twin ideas of diversification of risk and professional management. It is clearly defined in the memorandum of the fund and the trustee ensures that the fund adheres to the core principles laid out in the memorandum.  Accordingly, the fund invests in different types of securities in varied proportions based on their asset allocation model. These securities were equities, bonds, short-term money market liquid instruments, etc.

First Phase:

India’s first mutual fund was set up in 1963, by the Unit Trust of India (UTI), at the initiative of the Government of India and RBI to increase savings and investments from retail investors for a developed economy.   

Second Phase:

In 1978, UTI was de-linked from the RBI and IDBI took over the regulatory and administrative control of UTI. The first scheme US-64 launched by UTI was the most successful scheme of the UTI for a long period.

Third Phase:

Public sector banks started Mutual Funds business:

 SBI Mutual Fund was the first non-UTI mutual fund set up in June 1987,

Can bank Mutual Fund (Dec. 1987),

PNB Mutual Fund (Aug. 1989),

Indian Bank (Nov. 1989),

Bank of India (Jun. 1990) and;

Bank of Baroda Mutual Fund (Oct. 1992).

Fourth Phase:

Private sector Mutual Funds entered the fray.

The Kothari Pioneer (now merged with Franklin Templeton MF) was the first private-sector MF registered in July 1993. Since then, the industry has grown by leaps and bounds. With only one AMC in 1963, the industry has grown sharply. In 1993, there were only nine AMCs. Within three years, the number of AMCs rose to 26. At present, we have 43 AMCs.

Fifth Phase:

UTI was bifurcated into two separate entities

In February 2003, the UTI Act, of 1963 was repealed and UTI was bifurcated into two separate entities e.g. the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations, 1996.

Sixth Phase since 2012:

Mutual Funds Penetration in tier II and tier III cities.

The penetration of the Indian mutual fund industry is very low. However, in Bengaluru and other Metro cities the growth of Mutual Funds is significantly small. Bengaluru is still new money in Mutual Fund’s investments as Bengaluru is driven by technology largely. Nevertheless, India’s MF AUM to GDP ratio is pointedly lower at 15.9% in March 2022, compared to the world average of 75%, according to the IPO prospectus of KFintech. India’s AUM to GDP ratio is much lower than many developed economies such as the US.

Taking note of the lack of penetration of Mutual Funds, especially in tier II and tier III cities, and keeping given the interest of various stakeholders, SEBI initiated several positive measures in September 2012 to revive the sluggish Indian Mutual Fund industry and to increase MFs’ penetration beyond 30 cities. The reason is that the physical assets have disappointed largely real estate over the last eight, to 10 years has disappointed people enormously. However, people are becoming more and more mathematical about it, now they are measuring the internal rate of returns (IRRs) of the real estate investments compared to Mutual Fund returns. At present, millennials are the largest contributors in tier-two cities, although the larger tickets might not be with them ancestrally rich.

The under-penetrated market is now attracting new entrants, including fund houses sponsored by Zerodha Broking Ltd. and Nextbillion Technology Pvt., the entities behind the two largest Indian brokerages. Bajaj Finserv Mutual Fund and Helios Mutual Fund, also made their debut, bringing the total number of fund houses in India to 44. Additionally, BlackRock, the world’s largest money manager, is set to return to fund management in India through an equal joint venture with billionaire Mukesh Ambani’s financial services unit.

Seventh Phase:

The mutual funds industry has come of age:

The Indian Mutual Fund segment is one of the fastest-expanding segments of our Economy. The AUM of the Indian MF Industry has grown from ₹9.03 trillion as of January 31, 2014, to ₹52.74 trillion as of January 31, 2024, around a 6-fold increase in 10 years.  The MF Industry’s AUM has grown from ₹ 23.37 trillion as of January 31, 2019, to ₹52.74 trillion (Rupees Fifty-two lakh seventy-four thousand Crores) as of January 31, 2024, more than 2 fold increase in 5 years. As per the latest AMFI data, Indian Mutual Fund Industry’s Average Assets Under Management (AAUM) stood at ₹ 52.89 Lakh Crore (INR 52.89 Trillion), and Assets Under Management (AUM) of Indian Mutual Fund Industry as of January 31, 2024, stood at ₹ 52.74 lakh crore (INR 52.74 Trillion). The mutual fund industry has crossed a milestone of 10 crore folios during May 2021. The total number of accounts (or folios as per mutual fund parlance) as of January 31, 2024, stood at 16.96 crore (169.6 million), while the number of folios under Equity, Hybrid, and Oriented Solution Schemes, wherein the maximum investment is from retail segment stood at about 13.57 crore (135.7 million).   This extraordinary growth, marked by a 19% increase in fund assets during the first 11 months of 2023, beating global peers like the US, Japan, and China

Conclusion:

The factors leading to the development of the industry are large market Potential, high savings rate, comprehensive regulatory framework, tax policies, innovations of new schemes, aggressive role of distributors, investor education awareness by SEBI, and past performance.

(Data Source: Association of Mutual Funds in India)

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. The article should not be construed as solicitation material. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a purchase. Working with a financial advisor often leads to better investment decisions and greater long-term asset growth.

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