History of Indian Mutual Fund Industry

The mutual fund industry is a significant part of financial markets in India. It was introduced in India with the objective of attracting small investors and to make them invest in financial markets. For many, it became a preferred investment option compared to bank investments like fixed deposits, small savings schemes, etc., that earn low returns. As mutual fund schemes are professionally managed and are more diverse, most people in India prefer investing in them.

In this article, let us look at the history of this industry and see how it has grown successfully since its establishment.

Entry in India (1963)

The concept of mutual funds emerged in India with the formation of Unit Trust of India (UTI) in 1963 which is a watermark in the annals of history of mutual fund industry in India. It was initiated by government and the Reserve Bank of India (RBI) with an object to attract small investors and to encourage them to invest in schemes that help them create wealth in 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 the RBI for 15 years. Later, it was de-linked from RBI in 1978 and operated under the regulation of Industrial Development Bank of India (IDBI) which took over the administrative control from the RBI. The first unit scheme of UTI was launched in 1964 and later more innovative schemes were launched in 1970s and 1980s to attract and match the needs of Indian retail investors. By the end of 1987, the Assets Under Management (AUM) of UTI increased ten times to Rs 6,700 crore.

Entry of public sector players (1987)

Public sector players entered the market in 1987. SBI was the first non-UTI mutual fund in India. It has been successfully managing large investors’ funds since 1988. It launched many schemes to provide investors with opportunities to make profits by investing in stocks of various 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 and General Insurance Corporation (GIC) in 1990. By the close of 1993, the AUM of mutual fund industry had increased seven times to Rs 47,004 crore. However, the UTI retained its position as the dominant player with 80% of the market share.

Entry of private sector players (1993)

To provide a wider choice of funds to Indian investors, the private sector players along with foreign companies were permitted to enter India in 1993. In the same year, the first mutual fund regulation was passed, saying all 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 companies launched their schemes introducing innovative investment strategies.

SEBI regulation (1996)

The industry witnessed a sea change in the 1990s. In 1993, the 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 the industry. Consequently, there was a spurt in the number of mutual fund houses with many foreign players setting up their companies in India. By the end of 2003, there were 33 companies with total AUM of Rs 1,21,805 crore.

In 2003, UTI was disaggregated into two entities. Of them, 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.

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

The rapid growth of industry attracted many international companies like Fidelity, Franklin Templeton, etc. into the Indian market. At present there are 44 players in the market (as on March 2012), with an AUM of Rs 6.92 lakh crore (as on June 2012).

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