Before moving towards a brief timeline, let’s understand what a Mutual Fund is. So, in a mutual fund, a group of investors combine their hard-earned pennies and provide it to an investment manager, who makes investments on their behalf. The Securities and Exchange Commission (SEC) acts as an Independent body to supervise the funds.
Today we will discuss the history and impact of mutual funds on India's economic development. And the importance of credit-based financing and financial securities through the capital market in influencing a country's economic development. Further, it will extend existing literature on mutual funds in India and their return predictability.
Exploring the Roots of Mutual Funds in India
In our traditional investment approach, we favoured gold, real estate, and fixed deposits. However, the dynamic landscape of mutual funds has redirected our focus to the intricate world of financial markets. Guided by Asset Management Companies (AMCs), these funds not only pursue returns but also operate under the watchful eye of SEBI (Securities and Exchange Board of India), the vigilant guardian of the market.
Landmarks in the Evolution
India's mutual fund industry originated in 1963, marked by the establishment the Unit Trust of India (UTI), a collaborative venture between the Government of India and the Reserve Bank of India. This pivotal historical development can be delineated into four notable phases.
The Initial Phase (1964-87):
The parliamentary legislation put the Unit Trust of India operating initially under the regulatory umbrella of the Reserve Bank of India. However, in 1978, UTI experienced a significant change when it moved to the Industrial Development Bank of India (IDBI) and broke away from the RBI's supervision as a regulatory body. The 1964 launch of UTI's first Unit Scheme set the stage for its future expansion. As of 1988, UTI amassed assets under management amounting to Rs. 6,700 crores.
The Second Phase (1987-93):
During its second phase, the mutual fund industry in India experienced a major transformation in the late 1980s. In this phase, the non-UTI public sector funds like LIC, GIC, and public sector banks were among the major players that entered the market.
Among them, SBI Mutual Fund was the front-runner, with Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India, and Bank of Baroda Mutual Fund emerging in June 1987. In 1989 and 1990, respectively, LIC and GIC also entered the fray. The industry claimed impressive assets under management by the end of 1993, totalling Rs. 47,004 crores.
The Third Phase (1993-2003):
In this phase, India's government was more concerned with competing with the global economy. So in 1993, intending to lift the country's economy, the government greenlit the introduction of private sector funds into the Indian mutual fund market. This decision marked a significant turning point, offering Indian investors diverse investment options. Additionally, the inaugural set of mutual fund regulations came into play in the same year, requiring registration and oversight for all mutual funds, excluding UTI.
Kothari Pioneer, now part of Franklin Templeton, emerged as the pioneer in private-sector mutual funds, officially registered in July 1993. The regulatory landscape further evolved in 1996 with the introduction revised Mutual Fund Regulations by SEBI, shaping the industry's operations. Foreign mutual funds also entered the Indian market, leading to a surge in mutual fund houses and witnessing various mergers and acquisitions. By January 2003, there were 33 mutual funds with a combined asset base of Rs. 1,21,805 crores. UTI stood out with Rs. 44,541 crores in assets under management.
The Fourth Phase (Feb 2003 to Present):
In the fourth phase since February 2003, following the repeal of the Unit Trust of India Act 1963, UTI underwent bifurcation to form two separate entities. The Specified Undertaking of the Unit Trust of India, managing assets of Rs. 29,835 crores as of January 2003, focused on schemes like US 64 and assured return schemes. Operating under an administrator and governed by rules framed by the Government of India, it operates outside the purview of the Mutual Fund Regulations. This marked a crucial development in reshaping the landscape of mutual funds in India.
Best Mutual Fund Companies in India
- UTI Asset Management Company
- Quant Small Cap Fund Growth Option Direct Plan SBI Mutual Fund
- Aditya Birla Sun Life PSU Equity Fund Direct-Growth
- SBI PSU Direct Growth
- Motilal Oswal Financial Services
- HDFC AMC
- Aditya Birla Sun Life AMC Ltd Share Price
Takeaways
Mutual funds in India, originating in 1963 with Unit Trust of India, have undergone a dynamic evolution across four phases, navigating through public and private sector entries and post-UTI restructuring. Regulated by SEBI, this financial ecosystem, comprising AMCs, sponsors, and trustees, witnessed substantial growth after the bifurcation of UTI in 2003. The global influence of financial liberalisation and globalisation further transformed India's stock market, making it an integral hub for global investors. Amidst this transformative journey, there is a compelling call for profound research into the predictability of mutual funds' returns and their consequential role in shaping India's economic development. The government is required to bring financial literacy programs into the limelight. However, one must be rational towards investment goals, risk-taking appetite, and other factors like a mutual fund's Liquidity and Expense ratio before investing. Check out INDmoney to begin your financial journey with wisdom now!