The History and Evolution of Mutual Funds in India

Introduction

Mutual funds have become a cornerstone of the Indian investment landscape, gaining significant popularity in recent decades. This is driven by increasing awareness of investment options beyond traditional savings and fixed deposits, especially as the aspirations of the middle class evolve.

As a result, mutual funds have transitioned from niche products to essential investment vehicles, playing a crucial role in personal financial planning.

As of July 31, 2024, the industry’s assets under management (AUM) stood at ₹64.97 trillion, representing more than a six-fold increase from ₹10.06 trillion a decade ago, and more than double from ₹24.54 trillion in July 2019.

From their inception six decades ago to their current status, mutual funds have undergone numerous changes related to economic, regulatory, and investor preferences that have helped shape the investment practices of millions of people.

This blog delves into the rich history and evolution of mutual funds in India, examining their development from their early days to their present dominance. We will explore key milestones, regulatory changes, and the industry’s transformation over time, offering a comprehensive overview of how mutual funds have become a significant part of India’s financial fabric.

Historical trends of Mutual Funds in India

1. First Phase (1964-1987): The Genesis of Mutual Funds in India

• The concept of mutual funds originated in Europe and began taking shape in India in the early 1960s. India’s first mutual fund, the Unit Trust of India (UTI), was established by an Act of Parliament in 1963. Subsequently, it launched the first scheme, Unit Scheme 1964 (US ’64).
• UTI was established under the trusteeship of the Reserve Bank of India (RBI) with the objective of pooling investors’ savings and investing them in a diversified portfolio of securities. 
• It’s objective was to make investments accessible to the general public, for whom investment options were primarily limited to traditional savings accounts and fixed deposits.
• However, in 1978, the UTI was separated from the RBI. Subsequently, regulatory and administrative oversight of UTI was transferred to the Industrial Development Bank of India (IDBI). UTI managed to amass assets under management worth Rs 6,700 crore by the end of 1988.

Second Phase (1987-1993): Public Sector Companies Entry into the MF Segment

• Public sector mutual funds started entering the sector in 1987, starting with public sector banks and insurance companies such as Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
• The first fund to be set up outside UTI was SBI Mutual Fund, launched in June 1987, followed by Canbank Mutual Fund in December 1987. 
• Subsequently, Punjab National Bank Mutual Fund in August 1989, Indian Bank Mutual Fund in November 1989, Bank of India in June 1990, and Bank of Baroda Mutual Fund in October 1992 entered the field.
• Thereafter, LIC launched its mutual fund in June 1989, followed by GIC in December 1990. The entry of public sector banking and insurance companies with a high customer base resulted in massive growth in the industry, and its AUM reached Rs 47,004 crore by the end of 1993.

Third Phase (1993-2003): Entry of Private Sector Mutual Funds

• Following globalization in 1991, the Indian securities market gained prominence with the formation of the Securities and Exchange Board of India (SEBI) in April 1992. 
• SEBI was established to protect the interests of investors and to support and oversee the development and regulation of the securities market. In 1993, SEBI introduced its first set of Mutual Fund Regulations, which applied to all mutual funds except UTI.
• After Indian globalization, in July 1993, Kothari Pioneer became the first private sector company to enter the mutual fund industry, signaling the beginning of a new chapter in the Indian mutual fund industry.
• However, Kothari later merged with Franklin Templeton Mutual Fund. Its arrival encouraged companies like ICICI and Morgan Stanley Mutual Fund to enter this field.
• The original SEBI Regulations were amended in 1996 and replaced by the SEBI (Mutual Funds) Regulations, 1996, which are still in effect today. These regulations govern the sale of mutual fund units, outlining the rules for how mutual funds are regulated, with periodic reviews and amendments.
• Later, in 1995, a separate regulatory body for mutual funds, “Association of Mutual Funds in India (AMFI),” was established. Its objectives were to promote the mutual fund industry, advocate for the interests of investors, and ensure that mutual funds operate in a transparent and investor-friendly manner.
• The industry subsequently began to consolidate through mergers and acquisitions after foreign sponsors were allowed in. 
• However, in 10 years from 1992 to the end of January 2003, the total AUM of the industry with 33 mutual fund companies, tripled to Rs 121,805 crore, of which UTI alone accounted for Rs 44,541 crore.

Fourth Phase (2003-2014): Consolidation, stagnant growth due to 2008 Global Financial Crisis

1. In February 2003, UTI was split into two distinct entities:
   
   1. the Specified Undertaking of the Unit Trust of India (SUUTI), and 
   2. UTI Mutual Fund, which operates under SEBI’s mutual fund regulations.
      This separation, along with numerous mergers among private-sector funds, marked the beginning of the fourth phase of consolidation in the mutual fund industry.
      
2. By 2005, SEBI regulations allowed mutual funds to offer a variety of investment options, including equity, debt and hybrid funds, as per investors’ goals. Also, the introduction of direct plans in 2013 empowered investors to save costs by investing directly, making mutual funds more accessible and transparent.
3. However, the 2007 Global Financial criris (GFC) severely impacted securities markets, including India, causing significant losses to peak-time investors and eroding their confidence in mutual funds. 
4. Additionally, the removal of entry loads by SEBI and the after-effects of the crisis further strained the Indian mutual fund industry, leading to slow AUM growth from 2010 to 2013.

4. Fifth Phase- starting from May 2014 till now

• In September 2012, SEBI introduced measures to boost the Indian mutual fund industry’s penetration, especially in tier II and tier III cities. These reforms, along with the formation of a new government in 2014, successfully reversed the post-global financial crisis downturn.
• Since then, the industry has seen consistent growth in assets under management (AUM) and investor accounts. In May 2014, AUM surpassed Rs 10 trillion, doubled to Rs 20 trillion in August 2017, and tripled to over Rs 30 trillion in November 2020.
• As of July 2024, the industry’s AUM reached ₹64.97 trillion, up from ₹10.06 trillion in July 2014. The number of investor folios grew from 8.48 crore in July 2019 to 19.84 crore in July 2024, with an average of 18.93 lakh new folios added monthly over the past five years.
• This growth is attributed to SEBI’s regulatory reforms and the efforts of mutual fund distributors, who have expanded the retail base, supported investors during market fluctuations, and popularized Systematic Investment Plans (SIPs), which reached 9.34 crore accounts by July 2024

Key Players and Contributors

The founder of mutual funds in India is often attributed to the pioneers behind UTI. As the first player in the mutual fund industry, UTI laid the foundation for the industry’s growth. Over the years, other significant players have emerged, each contributing to the industry’s development:

• SBI Mutual Fund: SBI Mutual Fund is India’s largest mutual fund company, which has played a key role in expanding the access and choices of mutual funds for investors, and manages assets worth approximately Rs 9 trillion. ICICI Prudential Mutual Fund is at the second position with an AUM of around ₹6.8 lakh crore.
• HDFC Mutual Fund: Launched in 1999, HDFC Mutual Fund is the third-largest mutual fund company in India, and as of March 2024, it has assets under management (AUM) of around ₹6 trillion.

Challenges and Future Outlook

Despite its remarkable growth, the Indian mutual fund industry still grapples with significant challenges: market volatility that affects returns, ever-evolving regulations demanding constant adaptation, and a pressing need to enhance financial literacy among investors. Overcoming these hurdles is crucial to maintaining the industry’s momentum and bolstering investor confidence.

Looking ahead, the mutual fund industry in India is poised for further growth. Advances in technology, increased financial literacy, and a growing economy are expected to drive the industry’s expansion. The focus on transparency, investor protection, and innovation will continue to be central to the industry’s evolution.

Conclusion

The history and evolution of mutual funds in India reflect a journey of growth, innovation, and adaptation. From the establishment of UTI in the early 1960s to the introduction of new regulations and technological advancements, mutual funds have become a crucial investment vehicle for millions of Indians. As the industry continues to evolve, it remains committed to providing investors with dirse and accessible investment opportunities.

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