History of the Mutual Funds Industry in India

A mutual fund is an investment scheme that pools money from multiple investors, which is then invested into various types of securities. These schemes are offered by fund houses or Asset Management Companies (AMCs) that hire experienced fund managers to operate  mutual fund schemes. It is mandatory for these AMCs and anyone dealing with mutual funds to register with SEBI. 

So, when and how did all of these start? That’s what this article is about – the history of mutual funds in India. 

History of Mutual Funds in India 

The “mutual fund” concept was started in the Netherlands by a Dutch merchant named Adrian van Ketwich  in the late 18th century. However, the history of the mutual fund industry in India dates back to 1963 with the establishment of the first mutual fund house called the Unit Trust of India (UTI). It was an initiative of the Government of India and the Reserve Bank of India. 

Since then, the mutual fund industry has witnessed significant events which have altered its nature and essence. These developments are divided into five phases, which have been discussed below: 

• Phase I (1964-1987)

Our mutual fund industry started its journey with the establishment of the Unit Trust of India (UTI) in 1963. They introduced the first mutual fund scheme in India in 1964, which was known as the Unit Scheme 1964 (US ‘64). It worked as per the rules and regulations set by the Reserve Bank of India. 

However, UTI was separated from RBI in 1978. Industrial Development Bank of India (IDBI) took over the mutual fund house. By the end of 1988, UTI had Assets Under Management (AUM) of around Rs. 6,700 crore. 

• Phase II (1987-1993)

The second phase of the development of mutual funds marks the entry of public sector banks along with the Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI mutual fund is the first ‘non-UTI’ mutual fund which started its operations in June, 1987. Many other public sector banks followed SBI and stepped into the mutual fund business. 

1. Canara Mutual Fund (December 1987)
2. Punjab National Bank Mutual Fund (August 1989)
3. Indian Bank Mutual Fund (November 1989)
4. Bank of India (June 1990)
5. Bank of Baroda Mutual Fund (October 1992)

LIC and GIC also established their individual mutual funds in 1989 and 1990, respectively. By the end of 1993, the mutual fund industry in India had a total AUM of Rs. 47,004 crore. 

• Phase III (1993- 2003)

This third phase holds greater significance as it marked the entry of private sector funds and also the establishment of SEBI. 

The Securities and Exchange Board of India (SEBI) was established in 1992 in order to protect the interests of the investors in the securities market and to promote the development of, and to regulate, the securities market.. In 1993, SEBI introduced the first set of regulations that were applicable to all mutual funds, excluding UTI. 

Kothari Pioneer (presently merged with Franklin Templeton) was the first private sector mutual fund that came into existence in 1993.

In 1996, the SEBI guidelines were revised and made more comprehensive. All mutual funds currently follow the SEBI Regulations that were laid out in 1996. 

During this phase, the mutual fund industry saw tremendous growth. Many foreign AMCs set up their offices in India, and several large mergers and acquisitions took place. By the end of 2003, there were 33 mutual funds, and the total AUM were of Rs. 1,21,805 crore, out of which UTI alone had AUM of Rs. 44,541 crore.  

• Phase IV (2003-2014)

In February 2003, UTI was divided into two separate organisations. The first division was the Specified Undertaking of Unit Trust of India (SUUTI). The second division was the UTI Mutual Fund, named similarly after UTI, and has been operational as per SEBI regulations since February, 2003. 

Following the global economic melt-down in 2009, the financial markets across the world were facing a crisis, and so was India. Investors’ faith in the mutual fund industry was completely shattered. Additionally, SEBI’s omission of Entry Load and a few other after-effects of the global crisis escalated the already detrimental impact on the mutual fund industry. It struggled to reconstruct itself from the devastating situation for over two years. 

The repercussions left quite an impact, evident from the sluggish growth of AUM between 2010 and 2013. 

• Phase V (2014- Present)

SEBI identified the lack of penetration in the mutual fund industry, specifically in the tier-I and tier-II cities and introduced multiple progressive measures in order to “re-energise” this industry in 2012. 

The measures proved to be successful and were able to alleviate the adverse impact of the global melt-down; significantly after the formation of the new Government at the Centre. 

Since May 2014, this industry has seen steady growth in terms of cash inflows, AUM, and the number of investors. This growth has been possible by the dual efforts of SEBI’s measures and also the distributor’s reliability in expanding their market base. 

Distributors have a significant contribution to bringing in new investors, especially from small towns. Also, they have helped introduce and popularise the Systematic Investment Plan (SIP) among people, and it has brought in even more investors as SIP is an affordable investment mode. 

Highlights of the Mutual Fund Industry’s Evolution

Here are some important milestones in the years-long evolution of the mutual fund industry in India: 

• For the first time, the collective AUM of the mutual fund sector crossed Rs. 10 lakh crore on May 31, 2014. 
• AUM number saw a further increment and doubled in a short duration of just 3 years and reached Rs. 20 lakh crore in August 2017. 
• The AUM crossed Rs. 30 lakh crore mark in November 2020 for the first time, setting another milestone. 
• During the last five years, the AUM has grown to Rs. 39.34 lakh crore (as on August 31, 2022), which is double compared to Rs. 20.59 lakh crore in August 2017. 
• Overall, on average, 12.60 lakh new folios have been added every month since August 2017. 
• The number of investor folios has increased to 13.65 crore in August 2022 from 6.08 crore folios in August 2017. 

What Is the Future of Mutual Funds in India? 

As you can see from the milestones previously discussed, the mutual fund industry has significant growth potential in future. The SEBI has taken multiple measures to promote mutual funds as an ideal investment option in India.

The mutual fund industry can see a greater rise if more people start investing in mutual fund schemes, and currently, there are multiple types of funds to suit every individual’s financial requirements. 

Final Word 

The mutual fund industry has evolved significantly in the past few years. The Association of Mutual Funds in India (AMFI) has shown considerable support in promoting and expanding this industry, keeping in mind the investor’s interest and maintaining transparency. This shows how much it can expand with combined efforts from every investor, as well as AMFI and the Indian Government. 

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