History of Mutual Funds in India: Complete Overview

What is a Mutual Fund?

A mutual fund is a professionally managed investment that collects money from multiple investors and invests the pooled money into various assets like stocks, debts, government securities, and other market instruments. Instead of investing individually in multiple securities, investors can invest through mutual funds and gain exposure to a diversified portfolio. Professional fund managers assist the investment decision based on the investor’s objectives or goals.

Mutual funds are suitable for new investors as well as experienced investors because they offer professional management, portfolio diversification, easy liquidity, and support for financial objectives.

History of Mutual Funds in India

The mutual funds industry in India has evolved over a span of around 6 decades. It evolved in multiple stages, and each phase has played a major role in shaping the investment industry into what it is today.

Phase 1: Introduction to Mutual Funds in India (1963-1987)

The journey of the mutual fund started in 1963. This phase is known as the UTI era because of the establishment of the Unit Trust of India (UTI). The Government of India established it through an Act of Parliament in consultation with the Reserve Bank of India (RBI).

UTI marked the beginning of mutual fund investing in India with the launch of Unit Scheme 1964 (US-64). UTI was the pioneer mutual fund institution, who paved the way for various other institutions to introduce mutual fund schemes by launching the first mutual fund scheme, i.e., US-64. It got popular among the small and middle-class group of people because it was backed by the Government of India. 

Phase 2: Entry of Public Sector Mutual Funds (1987-1993)

The second phase began in 1987 when public sector banks and financial institutions were permitted to launch mutual fund schemes. This phase increased the competition among the banks and financial institutions, which resulted in spreading more awareness about mutual funds.

Although the mutual funds industry in India was evolving, the market was relatively smaller than in developed countries. 

The banks and financial institutions that introduced mutual fund schemes during this phase are SBI, Canara Bank, Bank of India, Punjab National Bank and Indian Bank.

Phase 3: Privatisation and Entry of SEBI Regulation (1993-2003)

In the year 1993, while the economy was undergoing liberalisation, many private companies were also allowed to introduce mutual fund schemes. This created space for more competition and resulted in innovation and improved service. 

At the same time, the SEBI was introduced as the regulating body of the mutual fund industry. It became the primary regulator of mutual fund companies, with a focus on maintaining transparency and protecting investors. It helped to bring improvement in the factors of transparency, protection of investors, management of risk, disclosure requirements and the operational standards of mutual fund companies.

This phase saw a rapid increase in private asset management companies (AMCs), broadening knowledge and product offerings.

Phase 4: Reconstruction and Modernisation (2003-2014)

This phrase saw the most rapid evolution. In 2003, the UTI was removed and divided into two separate parts. One of them was named the Specified Undertaking of Unit Trust of India, which was responsible for managing government liabilities, pending litigations and assets in major companies. And the other part was named UTI Mutual Funds under SEBI regulations, just like other mutual fund companies.

During this time, both the Indian economy and mutual fund industries were experiencing major challenges such as the 2008 financial crisis, but they bounced back stronger and more organised. Many mutual fund companies went through mergers and acquisitions within the industry. The SEBI regulations became stricter to improve transparency and overall trust in the industry. 

Phrase 5: Modernisation and Digital Expansion (2014-present)

The current phase of the mutual fund industry is experiencing a rapid growth in technology involvement and digitalisation. In 2014, SEBI introduced various measures to encourage people from small cities and towns to invest in mutual funds. This helped in increasing awareness, accessibility, and retail investors in small areas.

Mobile applications, the internet, online brokerages, and fintech platforms have made it easily accessible for retail investors. Systematic Investment Plans (SIPs) became a useful tool for wealth creation. This created space for young investors to participate in this industry.

The Assets Under Management of the mutual fund industry also experienced a massive growth as more people started to trust and participate in mutual fund investments.

How do Mutual Funds work in India today?

The current mutual fund industry includes 

1. Operational Mechanics 
2. Regulatory structure
3. Common investment methods
4. Types of mutual funds

Let’s look into each of them briefly:

1. Operational mechanics: The operational mechanics include the main functions of the mutual funds.

• Pooling: Money from several investors is collected and combined into a shared pool.
• Unit allocation: The investors are allotted units representing their share of funds, based on the amount of investments held by them
• Fund management: Professional fund managers manage and make necessary investment decisions depending on the fund’s financial goal.
• Net Asset Value: This determines the per-unit value of a fund. Its value is not fixed and fluctuates according to the performance of the underlying securities. 
• Returns and charges: Investor earns income through capital appreciation or dividends. And, a fee is charged for the operations of the AMCs, such as Total Expense Ratios (TERs) and management charges.

2. Regulatory body: The SEBI is the primary regulator of the mutual fund companies to ensure investor protection, transparency and fair practices.

• Sponsors: The sponsors are the entities or promoters who establish the mutual funds and register them under SEBI.
• Trustees: Trustees are the ‘watchdogs’ who monitor the activities of mutual funds and ensure that the AMCs are working strictly in the interest of the investors.
• Asset Management Companies (AMCs): The AMCs are responsible for managing the investor’s fund and rely on skilled fund managers for informed investment decisions.

3. Common investment methods: Investors can invest through two primary approaches.

• Systematic Investment Plans (SIPs): The SIP allows investors to invest small and periodic investments over time. It encourages disciplined and structured investment.
• Lump-sum: In this method, the investor pays a big sum of money at once rather than paying small amounts in instalments.

4. Types of Mutual Funds: 

• Equity mutual fund: The equity mutual fund mainly invests in company stocks and shares. They may include a higher level of risk but may also provide high growth potential if handled wisely.
• Debt mutual fund: The debt mutual fund usually invests in government bonds, company debts, and treasury bills. They include low risk and promise a fixed return.
• Hybrid mutual fund: By investing in a mix of both equity and debt investments, hybrid mutual funds aim to balance potential risks and returns, taking insights from the market movements.
• Index funds and ETFs: The index funds and Exchange Traded Funds are structured to reflect the the performance of a specified market index, including popular indexes like the Nifty 50 or the Sensex.

Final Thoughts

Over the last 6 decades, the mutual fund industry has expanded and evolved substantially. It began in 1963 with the formation of the Unit Trust of India and slowly expanded through the public sector and private asset management companies, under strict SEBI regulations. The industry went through major shifts and changes such as liberalisation, digitalisation, modernisation, stricter regulations, etc. Meanwhile, it also gained popularity among small retail investors and young investors. Today, mutual funds have become the most trustworthy and accessible investment options for Indian investors.

The increase in technology and the growing number of brokerage platforms have made it easier to access investments and contribute to the overall creation of wealth. The modern mutual fund industry is strictly regulated by the SEBI guidelines to ensure investors’ protection and transparency. It provides different methods of payment to choose from, such as SIPs and lump-sum investing, along with several fund categories such as equity, debt, hybrid and index funds and ETFs.

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