The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978, UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first
scheme launched by UTI was Unit Scheme 1964. At the end of 1988, UTI had ` 6,700 crores of
assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual
fund industry had assets under management of ` 47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India.
The industry has also witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of `1,21,805 crores. The Unit Trust of India with
`44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years.
Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.
Current Status
The Assets under Management (AuM) of the Asset Management Industry in India grew to 8252 billion INR in 2014. While the AuM has grown from approximately 470 billion INR as on 31 March 1993 to approximately 8,250 billion INR as on 31 March 2014 (reflecting a CAGR of 14.6% over the last 21 years), the Sensex has grown from approximately 2280.52 as on 31 March 1993 to 22,386.27 as on 31 March 2014 (reflecting a CAGR of approximately 11.5%).
Quite naturally, the growth of the Sensex and the AuM feed off one another and thus a portion of the AuM growth can be attributed to the growth of underlying stocks and indices.
Perhaps, it might be useful to revisit the broad savings and investment basket to help us review industry progress and growth. The industry has seen net flows of approximately 4900 billion INR from 2001 to 2014 (an average of 352 billion INR per annum). The change in the financial assets (gross financial savings) of the household sector in FY2012-13 was approximately 109,69 billion
INR, of which mutual funds attracted 274 billion INR (approximately 2.5%). Compared to this, the amount held in currencies was approximately 10%, the amount invested in deposits approximately 56%, life insurance gathered approximately 16% and pensions and provident funds gathered approximately 14.5%. Moreover, change in financial assets accounted for only a third of total household savings, the remaining two thirds held in physical assets such as gold and real estate.
Mutual fund penetration in India is low as compared to global and peer benchmarks. The AuM to GDP ratio stands at 7% to 8% as compared to a global average of 37%. Even the economy of Brazil, considered a peer emerging economy, is significantly ahead, with an AuM to GDP ratio of 45% (Source – AMFI, ICI FactBook 2013). Increasing mutual fund penetration will largely depend on increasing investor awareness at grass-roots level and providing access to financial services to the still largely unbanked population.
In its effort to increase investor awareness, the industry and the Securities and Exchange Board of India (SEBI) have launched several initiatives. These include literature and campaigns to propagate financial education to various investor segments (including potential investors), such as school and college students, homemakers, executives, etc.
The two-pronged approach of increasing awareness of and access to financial products and services has and will go a long way in increasing the penetration of mutual funds in the country.
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