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History of Indian Mutual Fund Industry

Category : NISM-Mutual Funds

7thJan. 2012, Ashish Pandey – Intelivisto

The idea of Mutual Fund had its formal origin in Belgium as investments in national industries associated with high risks. In 1860s this movement started in England. In 1868, the foreign and Colonial Government Trust was established to spread risks for investors over a large number of securities. In USA the idea took root in the beginning of the 20th century. In Canada, during 1920, many close ended investment companies were organized. The first mutual fund in Canada to issue its share to general public was the Canadian Investment Fund (1932). Large number of mutual funds emerged and expanded their wings in the many countries in Europe, the Far East countries and Latin America. Countries in Pacific area like Hong Kong, Thailand, Singapore and Korea have also entered this field in a long way.

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 (Establishment & Growth of UTI)

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, which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes during 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. Since establishment UTI enjoyed complete monopoly and by the end of 1987, UTI's assets under management grew ten times to Rs. 6700 crores.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

The Indian mutual fund industry witnessed a number of public sector players entering the market in 1987 including public sector banks and 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 increased by seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

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 and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 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 and 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.

In this phase, the mutual fund industry witnessed several merger & acquisitions and simultaneous entry of international mutual fund players like Franklin Templeton, Fidelity, DSP BlackRock, HSBC, JP Morgan, Mirae Asset, AIG Global etc.

The industry witnessed a compounded annual growth rate of 31.25% from March 2003 to March 2011 and total asset under management by March 2011 stood at Rs. 5,92,250 crores.

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