Evolution of Mutual funds in India

The mutual funds in Indiastarted in 1963 with the formation of Unit Trust of India, at the initiative of Reserve Bank and the Government of India. The objective was to attract the small investors and introduce to the market investments. Since the history of the mutual funds in Indiacan be broadly divided into six distinct phases. The growth of the mutual fund industry in Indiacan be divided into four phases viz. (a) Phase I (1964-1987), Phase II (1987-1992), Phase III (1992-1997) and Phase IV (Beyond 1997).

1.2.1    Phase I commenced with the establishment of UTI in 1964 and the launch of Unit Scheme 1964 (US-64). During this phase, UTI was the only institution offering mutual fund products and it experienced a consistent growth. UTI’s investible funds, at market value (and including the book value of fixed assets) progressively grew from Rs.49 crore in 1965 to Rs.219 crore in 1970-71, to Rs.1126 crore in 1980-81 and further to Rs.5,068 crore by June 1987. By that date, its investor base had also grown to about 2 million investors. During this phase, US-64 became increasingly popular as an alternative to bank deposits. Mastershare, the equity growth fund launched in 1986 was the first product in Indiato provide a dedicated vehicle for the entry of small investors into the equity market. It proved to be a grand marketing success. 1986 also saw the launch of India Fund, the first Indian off-shore fund for overseas investors which was listed on the London Stock Exchange.

1.2.2    Phase II witnessed the advent of competition in the mutual fund industry with the launch of mutual funds by subsidiaries of the nationalized banks and of the two insurance corporations viz. Life Insurance Corporation of India and the General Insurance Corporation of India. In 1988, UTI also floated another off-shore fund viz. The India Growth Fund which was listed on the New York Stock Exchange. During this phase, there was a dramatic growth in the size of the mutual fund industry with investible funds, at market value, increasing to Rs.53,462 crore and the number of investor accounts increasing to over 23 million. The buoyant equity markets in 1991-92 and tax benefits under Equity-linked Savings Schemes enhanced the attractiveness of equity funds.

1.2.3    Phase III marked the entry of private sector mutual funds including foreign sponsors as also the prescription in 1993 by the Securities and Exchange Board of India of mutual fund regulations. UTI’s Mastergain, launched in May 1992, was a phenomenal success with subscription of Rs.4,700 crore from 63 lakhs applicants. The investible funds, at market value, of the industry increased to Rs.78,655 crore and the number of investor accounts increased to 50 million. However, the industry entered a relatively sluggish phase from 1995. During 1995 and 1996, as capital market conditions were not conducive, the NAVs of the equity funds showed declines and closed funds traded at a discount to the NAV and, for the first time, investors saw an erosion in the value of their investments. Due to the very fast growth in the number of investor accounts, and the inadequacy of servicing infrastructure like R&T facilities, postal services and banking network, the quality of service declined. Both lower returns and decline in service standards led investors to gradually shift away from the mutual fund industry and average annual sales declined from about Rs.13,000 crore in 1991-94 to about Rs.9,000 crore in 1995 and 1996.

1.2.4    Phase IV saw in the initial year’s significant growth in the mutual fund industry aided by a more positive sentiment in the capital market, significant tax benefits and improvement in the quality of investor service. Investible funds, at market value, of the industry rose by June 2000 to over Rs.110,000 crore with UTI having 68% of the market share. During 1999-2000, sales mobilization reached a record level of Rs.73,000 crore as against Rs.31,420 crore in the preceding year. This trend has however sharply reversed in 2000-2001 and investible funds at market value have declined and there have been significant declines in the NAVs of funds.