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ULIP INSURANCE

Mutual Fund Industry in India

Jagrity Sharma Jagrity Sharma 29 July 2019

The growth of the Mutual Fund Industry in India has created its edge in the personal finance industry in India and has opened up opportunities to investors in order to diversify the investments across assets.

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Mutual Fund industry plays a key role in the Indian Financial Sector. This industry has come a long way since its inception in the year 1963. The expansion of this sector has been tremendous as it has seen growth in all parameters namely – assets under management, number of schemes, funds, fund houses etc. Investing in mutual fund has seen an upfront growth in India because of the nature of this instrument. Mutual fund is a type of financial intermediary that empowers million small as well as large investors across the country to participate and invest in capital market and derive benefits from it. Let us understand more about mutual fund, its history and growth in India.

What is Mutual Fund?

Mutual fund is a financial tool used for investing in capital market. It creates a pool of money by accepting investments from people, be it individuals or corporate houses or NRIs and invests it in capital market instruments like shares, debentures, stocks etc. The pool of money is generated from investors who share common financial goal namely capital appreciation and / or dividend earning. When you invest money in a mutual fund scheme, you get units of mutual fund as per its NAV i.e. net asset value. Investing in mutual fund is beneficial as it will help you in diversifying your portfolio, this investment is backed by professionals who help you take wise investment decisions.

Growth of mutual fund industry in India

Internationally, the dawn of mutual fund industry was witnessed in 19th century in Europe. It was Robert Fleming who set up the first ever mutual fund company called as ‘foreign and colonial investment trust’ in 1868 who promised to invest and overlook the finances of the investors. While in India, the introduction of mutual fund came a lot later. The journey of mutual fund in India started in the 1963 with the incorporation of ‘Unit Trust of India (UTI)’. The growth of mutual fund in India has happened in phased manner as under:

  • Phase 1: Formation and Growth of UTI (1964 to 1987) The phase 1 witnessed the incorporation and introduction of Unit Trust of India by passing an Act by Parliament. The incorporation of UTI was done by Reserve Bank of India. Post its incorporation, it was the only institution that accepted investments and offered mutual fund units. The first scheme launched by UTI was the Unit Scheme in the year 1964. Later in the years of 70s and 80s, UTI introduced various schemes as per the needs of Indian investors. The first ULIP (Unit Linked Insurance Plan) was introduced by UTI in the year 1971, while the 1st Indian Offshore Fund was launched in the year 1986. In this phase i.e. from the date of inception to the year 1987, the growth of UTI multiplied tremendously.

  • Phase 2: Establishment of Public Sector Funds (1987 to 1992) The year 1987 witnessed the establishment of public sector funds i.e. other public sector institutions like banks and NBFCs were allowed to start mutual fund houses. This resulted in opening up of economy and State Bank of India was the first bank to establish a mutual fund company in the year 1987. The footsteps of SBI were then followed by various other institutions like Canbank, Life Insurance Corporation of India, Indian Bank, Bank of India, General Insurance Corporation of India and Punjab National Bank introducing their own mutual fund companies. During this period, the asset under management under this sector increased from Rs. 6700 Crores to a whooping Rs. 47004 Crores as investors in India showed great interest in this financial tool and started investing a large part of their salary in Mutual funds.

  • Phase 3: Introduction of Private Sector Funds (1992 to 1997) After the successful introduction of Public Sector Funds, the mutual fund industry opened up and witnessed the establishment of private sector funds from the year 1993, giving Indian investors the extensive opportunity to choose mutual funds from public and private sector. On the other hand, it increased the competition for Indian mutual fund companies.

  • Phase 4: Growth and introduction of SEBI regulations (1997 to 1999) As the mutual fund sector was witnessing and achieving newer heights, it was important to create a body that created comprehensive rules and regulation for this industry and creating a responsible organisation to overlook the working of this sector. This gave birth to incorporation of SEBI Regulation in 1996. SEBI introduced standardization and set uniform rules and regulations for all funds. It was during this phase that SEBI and AMFI launched an awareness scheme for investors of mutual funds.

  • Phase 5: Emergence of a Large and Stable Industry (1999 to 2004) This phase witnessed the integration of the entire industry with a similar set of rules and regulations. The uniform and standardized operations and regulations made it easier for investors to invest in various mutual fund companies resulting in increase of asset under management from Rs. 68000 crores in previous phase to over Rs. 1.50 lakh crores during this phase.

  • Phase 6: Amalgamation and Growth (2004 onwards) The mutual fund industry has seen immense growth and globalisation since the day of its incorporation. From the year 2004, this industry witnessed integration as there were many mergers, demergers and acquisitions of companies and schemes like Allianz Mutual Fund taken over by Birla Sun Life, PNB mutual fund by Principal etc. Thus, since the year 2004, this industry is coping and integrating new players, dealing with mergers and acquisitions and continuing its journey towards growth.

Structure of Mutual Funds in India

Let us understand the structure and working of best mutual fund to invest in India. The structure of mutual funds in India is designed by SEBI, thus determining it to be very well crafted and regulated. The regulations laid by SEBI has made the operations and working of this industry very transparent and SEBI working closely towards protecting the investor’s interest. The mutual fund industry operates on 4 tier structure as under:

  • Sponsor: A sponsor is a corporate body acting alone or with another corporate body who establishes the mutual fund. This sponsor must contribute to 40% to the asset management companies’ net worth.

  • Board of Trustees: Board of trustee is an independent third-party board who are responsible to working towards protecting the interest of the unit-holders by holding and overlooking the property owned by the mutual fund.

  • Asset Management Company (AMC): The AMC are the fund managers of the investor. This body is responsible to invest the investor’s money in various capital market instruments.

  • Custodian: The SEBI regulation specifies that all mutual funds must park their securities with SEBI registered custodian bank.

Over decades, the Indian Mutual Fund Industry has seen a lot of development and growth. It has become more organized and transparent in terms of its functioning, since the inception few mutual fund companies have been offering top notch mutual fund schemes. If you wish to invest in mutual funds, you can invest in these top equity funds of 2019: SBI Bluechip Fund, SBI Magnum Multicap Fund, Axis Bluechip Fund, ICICI Prudential Bluechip Fund, UTI-ST Income fund.

Recommended Read: What is a Zero Risk Debt Mutual Fund Scheme?

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!