The Indian mutual fund industry has grown significantly since its inception in 1963. It has evolved through various phases from the establishment of UTI as the sole player to increased competition and regulation. Today there are over 100 funds with over $250 billion in assets. Going forward, factors such as financial inclusion, international players, and new product offerings are expected to drive further growth. However, challenges remain around fees, returns, and market penetration in rural areas.
1. EMERGING TRENDS IN INDIAN MUTUL FUNDS
Content:
Introduction
Definition of 'Mutual Fund'
Origin of Mutul funds
The Evolution
Advantages and Disadvantages
The Future of Mutul funds in india facts on growth
Conclusion
Introduction:
A mutual fund is a type of professionally-managed type collective investment
scheme that pools money from many investors. While there is no legal definition of mutual fund,
the term is most commonly applied only to those collective investment schemes that are
regulated, available to the general public and open-ended in nature. Hedge funds are not
considered a type of mutual fund.
The term mutual fund is less widely used outside of the United States. For collective
investment schemes outside of the United States, see articles on specific types of funds including
open-ended investment companies, SICAVs, unitized insurance funds, unit trusts and
Undertakings for Collective Investment in Transferable Securities.
Definition of 'Mutual Fund'
An investment vehicle that is made up of a pool of funds collected from many
investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and similar assets. Mutual funds are operated by money managers, who
invest the fund's capital and attempt to produce capital gains and income for the fund's investors.
A mutual fund's portfolio is structured and maintained to match the investment objectives stated
in its prospectus.
2. Origin of Mutul funds:
The first mutual funds were established in Europe. One researcher credits a Dutch
merchant with creating the first mutual fund in 1774. The first mutual fund outside the
Netherlands was the Foreign & Colonial Government Trust, which was established in London in
1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock
exchange.
Mutual funds were introduced into the United States in the 1890s. They became popular during
the 1920s. These early funds were generally of the closed-end type with a fixed number of shares
which often traded at prices above the value of the portfolio.
The first open-end mutual fund with redeemable shares was established on March 21, 1924. This
fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However,
closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929,
open-end funds accounted for only 5% of the industry's $27 billion in total assets.
After the stock market crash of 1929, Congress passed a series of acts regulating the securities
markets in general and mutual funds in particular. The Securities Act of 1933 requires that all
investments sold to the public, including mutual funds, be registered with the Securities and
Exchange Commission and that they provide prospective investors with a prospectus that
discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires
that issuers of securities, including mutual funds, report regularly to their investors; this act also
created the Securities and Exchange Commission, which is the principal regulator of mutual
funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, while
the Investment Company Act of 1940 governs their structure.
When confidence in the stock market returned in the 1950s, the mutual fund industry began to
grow again. By 1970, there were approximately 360 funds with $48 billion in assets. The
introduction of money market funds in the high interest rate environment of the late 1970s
boosted industry growth dramatically. The first retail index fund, First Index Investment Trust,
was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the
Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100
billion in assets as of January 31, 2011.
Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bull
market for both stocks and bonds, new product introductions (including tax-exempt bond, sector,
international and target date funds) and wider distribution of fund shares. Among the new
distribution channels were retirement plans. Mutual funds are now the preferred investment
option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined
contribution plans and in individual retirement accounts (IRAs), all of which surged in popularity
in the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008.
3. In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund
shareholders. Some fund management companies allowed favored investors to engage in late
trading, which is illegal, or market timing, which is a practice prohibited by fund policy. The
scandal was initially discovered by then-New York State Attorney General Eliot Spitzer and
resulted in significantly increased regulation of the industry.
At the end of 2010, there were over 15,000 mutual funds of all types in the United
States with combined assets of $13.1 trillion, according to the Investment Company Institute
(ICI), a national trade association of investment companies in the United States. The ICI reports
that worldwide mutual fund assets were $24.7 trillion on the same date.
Mutual funds play an important in U.S. household finances. At the end of 2010, they
accounted for 23% of household financial assets. Their role in retirement planning is particularly
significant. Roughly half of assets in 401(k) plans and individual retirement accounts were
invested in mutual funds.
When three Boston securities executives pooled their money together in 1924 tocreate
the first mutual fund, they had no idea how popular mutual funds wouldbecome.The idea of
pooling money together for investing purposes started in Europe in themid-1800s.
The first pooled fund in the U.S. was created in 1893 for the faculty andstaff of
Harvard University. On March 21st, 1924 the first official mutual fund wasborn. It was called the
Massachusetts Investors Trust.After one year, the Massachusetts Investors Trust grew from
$50,000 in assets in1924 to $392,000 in assets (with around 200 shareholders).
In contrast, there areover 10,000 mutual funds in the U.S. today totaling around $7
trillion (withapproximately 83million individual investors) accor ding to the
InvestmentCompany Institute.The stock market crash of 1929 slowed the growth of mutual
funds. In response tothe stock market crash, Congress passed the Securities Act of 1933 and
theSecurities Exchange Act of 1934.
These laws require that a fund be registered withthe SEC and provide prospective
investors with a prospectus. The SEC(U.S. Securities and Exchange Commission) helped
create the Investment Company Actof 1940 which provides the guidelines that all funds must
comply with today.With renewed confidence in the stock market, mutual funds began to
blossom. Bythe end of the 1960s there were around 270 funds with $48 billion in assets.In 1976,
John C. Bogle opened the first retail index fundcalled the First IndexInvestment Trust.
It is now called the Vanguard500 Index fund and in November of 2000 it became the
largest mutual fund ever with $100 billion in assets. One of the largest contributors of mutual
fund growth was Individual Retirement Account (IRA) provisions made in 1981, allowing
individuals (including those already in corporate pension plans) to contribute $2,000 a year.
Mutual funds are now popular in employer-sponsored defined contribution retirement plans
(401k),IRAs and Roth IRAs. Mutual funds are very popular today, known for ease-of-use,
liquidity, and unique diversification capabilities.
4. The Evolution
The formation of Unit Trust of India marked the evolution of the Indian mutual fund
industry in the year 1963. The primary objective at that time was to attract the small investors
and it was made possible through the collective efforts of the Government of India and the
Reserve Bank of India. The history of mutual fund industry in India can be better understood
dividedintofollowingphases:
Phase 1. Establishment and Growth of Unit Trust of India - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963
by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate
under the regulatory control of the RBI until the two were de-linked in 1978 and the entire
control was tranferred in the hands of Industrial Development Bank of India (IDBI). UTI
launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the
largest number of investors in any single investment scheme over the years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different
investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth
Fund and India Fund (India's first offshore fund) in 1986, Mastershare (Inida's first equity
diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during
1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.
Phase II. Entry of Public Sector Funds - 1987-1993
The Indian mutual fund industry witnessed a number of public sector players entering the
market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India
became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank
Mutual Fund, LIC Mutual Fund, Indian Bank Muatual Fund, Bank of India Mutual Fund, GIC
Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry
increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about
80% market share.
Amount Assets Under Mobilisation as % of gross
1992-93
Mobilised Management Domestic Savings
UTI 11,057 38,247 5.2%
Public Sector 1,964 8,757 0.9%
Total 13,021 47,004 6.1%
5. Phase III. Emergence of Private Secor Funds - 1993-96
The permission given to private sector funds including foreign fund management
companies (most of them entering through joint ventures with Indian promoters) to enter the
mutal fund industry in 1993, provided a wide range of choice to investors and more competition
in the industry. Private funds introduced innovative products, investment techniques and
investor-servicing technology. By 1994-95, about 11 private sector funds had launched their
schemes.
PhaseIV.Growth and SEBI Regulation 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI
after the year 1996. The mobilisation of funds and the number of players operating in the
industry reached new heights as investors started showing more interest in mutual funds.
Invetors' interests were safeguarded by SEBI and the Government offered tax benefits to
the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was
introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget
in 1999 exempted all dividend incomes in the hands of investors from income tax. Various
Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI,
with an objective to educate investors and make them informed about the mutual fund industry.
In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal
status as a trust formed by an Act of Parliament. The primary objective behind this was to bring
all mutal fund players on the same level. UTI was re-organised into two parts: 1. The Specified
Undertaking, 2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past
schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI
Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in
mobilisation of funds from investors and assets under management which is supported by the
following data:
6. GROSS FUND MOBILISATION (RS. CRORES)
PUBLIC PRIVATE
FROM TO UTI TOTAL
SECTOR SECTOR
01-April-98 31-March-99 11,679 1,732 7,966 21,377
01-April-99 31-March-00 13,536 4,039 42,173 59,748
01-April-00 31-March-01 12,413 6,192 74,352 92,957
01-April-01 31-March-02 4,643 13,613 1,46,267 1,64,523
01-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,979
01-Feb.-03 31-March-03 * 7,259* 58,435 65,694
01-April-03 31-March-04 - 68,558 5,21,632 5,90,190
01-April-04 31-March-05 - 1,03,246 7,36,416 8,39,662
01-April-05 31-March-06 - 1,83,446 9,14,712 10,98,158
ASSETS UNDER MANAGEMENT (RS. CRORES)
AS ON UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL
31-March-99 53,320 8,292 6,860 68,472
Phase V. Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently, examples of
which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual
Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international
mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There
were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry
through consolidation and entry of new international and private sector players.
7. Advantages and Disadvantages
Mutual funds have advantages compared to direct investing in individual securities. These
include:
Increased diversification
Daily liquidity
Professional investment management
Ability to participate in investments that may be available only to larger investors
Service and convenience
Government oversight
Ease of comparison
Mutual funds have disadvantages as well, which includ:
Fees
Less control over timing of recognition of gains
Less predictable income
No opportunity to customize
8. Future of Mutual Funds In India-Facts on growth
Important aspects related to the future of mutual funds in India are -
The growth rate was 100 % in 6 previous years.
The saving rate in India is 23 %.
There is a huge scope in the future for the expansion of the mutual funds industry.
A number of foreign based assets management companies are venturing into Indian
markets.
The Securities Exchange Board of India has allowed the introduction of commodity
mutual funds.
The emphasis is being given on the effective corporate governance of Mutual Funds.
The Mutual funds in India has the scope of penetrating into the rural and semi urban
areas.
Financial planners are introduced into the market, which would provide the people with
better financial planning.
Conclusion:
Professional Investment Management. By pooling the money of thousands of
investors, mutual funds provide full-time, high-level professional management that few
individual investors can afford to obtain independently. Such management can be important to
achieving results in today's complex markets.
Mutual funds invest in a broad range of securities. This limits investment risk by
reducing the effect of a possible decline in the value of any one security. Mutual fund
shareowners can benefit from diversification techniques usually available only to investors
wealthy enough to buy significant positions in a wide variety of securities.
Investor Information Shareholders receive regular reports from the mutual funds,
including details of transactions on a year-to-date basis. The current net asset value of your shares (the
price at which you may purchase or redeem them) appears in the mutual fund price listings of daily
newspapers. You can also obtain pricing and performance results for the all mutual funds at this site, or it
can be obtained by phone from the mutual funds.