Mutual funds have become a popular investment vehicle for millions of Indians including residents, Non-Resident Indians (NRI) or Overseas Citizen of India (OCI) over the past few decades. Offering a diverse portfolio and professional management, mutual funds provide an accessible way for investors to participate in the financial markets. This blog will take you through the journey of mutual funds in India, highlighting their evolution, growth, and significance in the Indian financial landscape.
How do Mutual Funds Work?
Mutual funds are an investment scheme that pools money and these investments are managed by a professional manager. A mutual fund collects funds from numerous investors to purchase a variety of stocks, bonds, and other securities, managed by professional money managers. As a result, compared to purchasing individual equities, individual investors can access a greater variety of assets with lower investment risk. Mutual funds provide comfort through automatic investing options, but they also come with fees that can reduce overall returns. This is particularly true for employer-sponsored retirement plans. They offer professionally managed, diversified portfolios as a means of wealth accumulation for middle-class workers.
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When Did Mutual Funds Start in India?
Mutual Funds in India began in 1963 with the founding of the Unit Trust of India (UTI). It was the Reserve Bank of India and the Indian Government that took this move. Allowing people to share in the income, gains, and profits from the management and sale of assets was the main goal, as well as increasing investment and saving. To create a strong financial market with broad participation—a requirement for a modern economy—UTI played a critical role in the development of the mutual fund business in India.
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First Phase of Mutual Funds in India (1964-1987)
Under the guidance of the Reserve Bank of India (RBI), the Unit Trust of India (UTI) was set up in 1963 by an Act of Parliament, marking the beginning of the mutual fund industry in India. The RBI lost its regulatory power to the Industrial Development Bank of India (IDBI) in 1978. The Unit Program 1964 (US ’64) was the first program offered by UTI. UTI managed investments totaling ₹ 6,700 crores by the end of 1988. This denoted the beginning (1964–1987) of the Indian mutual fund business and set the foundations for its upcoming growth.
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Second Phase of Mutual Funds in India (1987-1993): Entry of Public Sector Mutual Funds
Government-owned mutual funds were first introduced in 1987.After being created by Public Sector banks, the Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC). The first “non-UTI” mutual fund was SBI Mutual Fund, which was founded in June 1987. Other funds that were established in the same way were:
- Canbank Mutual Fund.
- Punjab National Bank Mutual Fund.
- Indian Bank Mutual Fund, Nov 1989.
- Bank of India, June 1990.
- Bank of Baroda Mutual Fund, Oct. 1992.
On June 29, 1989, LIC launched its mutual fund, followed by December 30, 1990, GIC launched its own. By the end of 1993, the mutual fund sector managed assets valued at ₹47,004 crores.
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Third Phase of Mutual Funds in India (1993-2003): Entry of Private Sector Mutual Funds
In July 1993, Kothari Pioneer became the first private-sector mutual fund to enter the Indian market during the third phase (1993-2003). The financial services sector was developed and regulated in part by the formation of SEBI in April 1992. Introduced in 1993, the initial SEBI Mutual Fund Regulations were updated in 1996. Investors had greater choices for mutual fund products during this decade, and there were more mutual funds overall. Many of which had foreign sponsors. AUM (total assets under management) of ₹1,21,805 crores was held by 33 mutual funds by January 2003, of which ₹44,541 crores were managed by UTI alone.
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Fourth Phase of Mutual Funds in India (February 2003 – April 2014)
Beginning with UTI’s division into SUUTI and UTI Mutual Fund, which are now under SEBI regulation, the fourth phase ran from February 2003 to April 2014. Many private mutual fund partnerships developed during this period. A market fall, followed by the global financial crisis in 2009 resulted in financial losses for many investors who had put their faith in mutual funds. The industry suffered more damage as a result of the crisis and SEBI’s reduction in the Entry Load. Due to the industry’s difficulties in recovering and growing, the growth of assets under management (AUM) was weak between 2010 and 2013.
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Fifth Phase of Mutual Funds in India (May 2014 to Present)
SEBI launched several ambitious initiatives in 2012 aiming to boost the mutual fund investment scene in India and make it accessible to common investors. This phase also aims to address the low mutual fund penetration, particularly in tier II and tier III cities, and better align the interests of various stakeholders. Following the global financial crisis, these efforts began to yield positive results, which were further accelerated with the establishment of the new government at the center. Since May 2014, the industry has experienced a steady increase in assets under management (AUM) and the number of investor folios, alongside sustained inflows.
This phase also includes the increase and growth of digitalization and the increase of SIP options for consumers.
Digital Revolution: The advent of the internet and digital technologies revolutionized the mutual fund industry in India. Online platforms and mobile apps made it easier for investors to access information, compare schemes, and invest in mutual funds. The rise of fintech companies further democratized investing, making mutual funds accessible to a broader audience.
Systematic Investment Plans (SIPs): Systematic Investment Plans (SIPs) emerged as a game-changer for the mutual fund industry. SIPs allow investors to invest a fixed amount regularly, making it convenient for individuals to build wealth over time. The popularity of SIPs has grown exponentially, attracting a large number of retail investors and contributing significantly to the industry’s AUM.
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Impact of Regulatory Reforms from SEBI in Shaping Mutual Fund Industry
SEBI has played a crucial role in shaping the mutual fund industry in India. The regulator has introduced several reforms to enhance transparency, investor protection, and market integrity. Key initiatives include the introduction of risk-based categorization of schemes, expense ratio caps, and disclosure norms. These measures have instilled confidence among investors and ensured a more robust regulatory framework.
What is the “Mutual Fund Sahi Hai” Campaign?
The “Mutual Fund Sahi Hai” campaign launched by the Association of Mutual Funds in India (AMFI) in 2017 has been instrumental in creating awareness about mutual funds. The campaign aimed to educate investors about the benefits of mutual fund investments and dispel common myths. It has significantly contributed to the growing acceptance and popularity of mutual funds among retail investors.
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How Are Mutual Funds Performing in India?
The COVID-19 pandemic and political unrest have caused economic difficulties around the world, but the Indian mutual fund sector has grown and survived successfully. The assets under management (AUM) doubled in the last five years, from Rs. 22.26 lakh crore in 2019–20 to Rs. 54.1 lakh crore in 2023–2024. The following is the growth year over year:
- 2019-20: Rs. 22.26 lakh crore
- 2020-21: Rs. 31.43 lakh crore
- 2021-22: Rs. 37.5 lakh crore
- 2022-23: Rs. 40.5 lakh crore
- 2023-24: Rs. 54.1 lakh crore
The continuous rise in performance shows the outstanding performance of mutual funds in India.
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Wrapping up
Since the beginning of the mid-20th century, mutual funds have enjoyed an outstanding journey throughout history in India. Mutual funds were not very popular at first. But as time passed investors began to take notice of them, and now they are among the most well-known investment vehicles in India. This development has changed the face of personal finance and given people the tools they need to become financially independent in the long run. The industry’s durability and expansion underscore its importance within India’s financial ecosystem, even in the face of challenges like the COVID-19 pandemic and the 2009 financial crisis.
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FAQs
How do mutual funds make money in India?
Mutual funds in India make money by charging fees to investors. These fees include:
- Expense Ratio: A percentage of the assets under management, which covers the fund’s operating costs. Depending on the fund, this can range from nearly 0% to over 2%.
- Sales Commission (Load): A fee charged when you buy or sell fund shares.
These charges help mutual fund companies cover their expenses and earn a profit.
How do people make money from mutual funds?
If you own a mutual fund, you can make money in two main ways:
- Dividends: Regular payments made to shareholders from the fund’s earnings. They are given for holding onto the mutual fund.
- Capital Gains: Profits earned when the fund sells investments at a higher price than it paid.
Both dividends and capital gains can help you earn returns from your mutual fund investments.
Can I invest 500 rupees in a mutual fund?
Yes, you can invest Rs. 500 in mutual funds. You can start your investment with a Systematic Investment Plan (SIP) with this amount. SIPs allow you to invest small amounts regularly and benefit from mutual funds without needing to spend much time on research. It’s easy to invest with no effort.
What is a mutual fund used for?
Investing in securities such as stocks, bonds, money market instruments, and other assets is done through a mutual fund.
What are mutual fund types according to structure?
The three mutual funds based on structure are Open-Ended Funds, Close-Ended Funds and Interval Funds.
What are some types of debt mutual funds?
Medium Duration Fund, Long Duration Fund and Dynamic Bond Fund
What are some types of equity mutual funds?
The different types of equity mutual funds are large cap funds, mid-cap funds, small-cap funds, multi-cap funds, flexi-cap funds, value fund, contra fund and sectoral/thematic fund and more.
