Growth of Mutual Fund Industry in India

The mutual fund industry in India has witnessed remarkable growth and evolution over the years, reflecting the changing dynamics of the country’s financial landscape. Starting with the establishment of the Unit Trust of India (UTI) in 1963, India’s mutual fund sector gained momentum in the early 1990s with the introduction of economic reforms. Therefore, in recent years, the mutual fund industry has diversified its product offerings to cater to a wide range of investor preferences, including equity funds, debt funds, hybrid funds, and thematic funds. As the growth of mutual funds in India continues, the mutual fund industry is expected to play a crucial role in channelling savings into productive investments, contributing to the overall development of the financial markets.

What is a Mutual Fund?

Mutual funds are financial instruments that essentially serve as collective investment vehicles. It pools money from numerous investors to create a diversified portfolio of stocks, bonds, or other securities. These investment pools are managed by professional fund managers who make strategic decisions to maximize returns for the investors. What sets mutual funds apart is their ability to democratize investment opportunities. They provide even small investors access to professionally managed and diversified portfolios, mitigating individual risk.

However, when you invest money in a mutual fund scheme, you may receive units based on its Net Asset Value (NAV). Opting for mutual fund investment can be a good option as it facilitates portfolio diversification, guided by seasoned professionals who assist in making sound investment choices.

History of Growth of Mutual Funds in India

Since its inception in 1963, the Indian Mutual Fund industry has undergone a series of events. Broadly, the span of six decades (1963-2023), the Mutual Fund industry can be divided into five phases, each fostering the culture of saving and investment.

• The first phase lasted for about 23 years and was entirely under the control of UTI, a government entity. In 1963, the Unit Trust of India under government auspices was formed and in 1964, UTI Scheme was introduced.

• In 1987, Mutual Funds were initially issued by public sector banks, marking the commencement of the second phase. Over the following six years (1987-1993), the Assets Under Management (AUM) witnessed a Compound Annual Growth Rate (CAGR) of 38.4%, reflecting a rise in investor acceptance and trust.

• The third phase, which lasted for 10 years, from 1993 to 2003, emerged as a critical period in the expansion of mutual funds in India. During this phase, the government granted permission for private sector firms to introduce Mutual Funds, leading to a significant surge in both the quantity of Mutual Funds and the Assets Under Management (AUM).

• During the fourth phase (2003-2014), the Mutual Fund industry encountered a setback. In 2014, the duration of a long-term debt mutual fund was extended from 12 months to 36 months. Simultaneously, the exemption limit under Section 80C was increased to Rs 1.5 lakhs.

• To re-establish investor confidence, the SEBI implemented a range of measures during the fifth phase (Since 2014). In 2017, the tax advantages of RGESS were discontinued, and SEBI mandated mutual fund reclassification, a directive that fund houses are required to implement.

Previous Year Performances

The performance of a mutual fund significantly influences investment decisions more than redemption decisions. However, various types of investors exhibit inconsistent behavior concerning the aspects of performance they deem important.

The Indian mutual fund industry has encountered challenges in recent years, especially due to the 2016 demonetization and the resulting economic slowdown, leading to a notable drop in investment inflows.

Yet, there’s a positive shift happening now. Government initiatives to enhance financial inclusion and minimize leaks are restoring investor confidence. Furthermore, ongoing efforts to enhance transparency and lower costs in mutual fund investments are being introduced regularly.

Growth of Mutual Fund Industry in India

In 2022, the estimated count of registered mutual fund investors in India is expected to reach approximately 1.88 crores, surpassing the count of households earning an annual income exceeding Rs 10 lakh, which stands at 1.86 crores. Moreover, the exponential growth in the number of mutual funds being offered is significantly increasing.

A few years ago, only three primary funds were provided by financial institutions like HDFC MF and ICICI Prudential MF. Financial institutions offer nearly 50 diverse schemes and a wide array of products across categories. These categories include equity funds, balanced funds, etc., posing a challenge for investors to make a selection.

Nevertheless, amid the escalating competition among mutual funds in recent years, their performance has remained consistently robust, resulting in substantial benefits for investors.

The sector has experienced swift expansion in recent years, with a growth rate of almost 40% per year.

However, the primary factor contributing to the mutual fund industry growth in India is the increasing acceptance of mutual funds. Consequently, there has been a surge in the number of individuals channelling their investments into mutual funds, effectively fulfilling this growing demand.

Structure of Mutual Funds in India

SEBI designs the structure of mutual funds in India, ensuring it is well-crafted and regulated. SEBI’s regulations have rendered the operations and mechanisms of this industry highly transparent, with SEBI actively safeguarding the interests of investors. The mutual fund sector operates on a four-tier structure as outlined below:

Sponsor

A sponsor refers to a corporate entity, either independently or in collaboration with other corporate bodies, that establishes the mutual fund. Asset management companies require the promoter to contribute a minimum of 40% to the net worth.

Board of Trustees

The Board of Trustees comprises independent third-party members responsible for safeguarding the interests of unit-holders. Therefore, they oversee and manage the properties owned by the mutual fund.

Asset Management Company (AMC)

The AMC serves as the fund manager for investors, responsible for deploying investor funds in various capital market instruments.

Custodian

All mutual funds must deposit their securities with a custodian bank registered with SEBI in adherence to SEBI regulations.

Factors Affecting the Growth of Mutual Funds in India

Multiple internal and external factors influence the growth of the mutual fund industry in India. Here are some key ones to consider:

Internal Factors

• Performance: Consistent track record of generating alpha (returns exceeding market benchmarks) can attract investors and boost confidence.
• Expense Ratio: Lower fees lead to higher returns for investors, making the fund more attractive.
• Fund Management: Expertise and experience of the fund manager play a crucial role in portfolio selection and performance.
• Product Innovation: Offering diverse schemes catering to different risk appetites and investment goals can broaden the investor base.
• Technology Adoption: Leveraging technology for online platforms, mobile apps, and automated investing can simplify access and improve convenience.

External Factors

• Economic Growth: A strong and stable economy with rising disposable incomes encourages savings and investments.
• Market Sentiment: Positive investor sentiment towards equity markets can drive capital inflows into mutual funds.
• Government Policy: Favorable policy initiatives like tax breaks for mutual fund investments can stimulate growth.

Changes in Mutual Fund Industry by SEBI

The growth of mutual fund industry in India is backed by the initiative and directives led by SEBI. Therefore, these can be classified into four categories: 

Focus on Investor Protection

• Grading of Mutual Funds: SEBI introduced a risk-based grading system for mutual funds to help investors make informed choices based on their risk appetite.
• Exit Load Rationalization: Exit loads, charges levied on investors exiting a scheme before a specific period,have been rationalized and capped to prevent excessive investor lock-in.

Enhanced Transparency and Disclosure

• Scheme Information Document (SID): SEBI standardized the SID format to provide investors with clear and concise information about mutual fund schemes.
• Portfolio Disclosure Norms: Mutual funds are now required to disclose their portfolio holdings more frequently, enhancing transparency.

Streamlining Regulations and Operations

• Consolidated KYC (Know Your Customer): A multitude of factors, both internal and external, influence the growth of the mutual fund industry in India.
• Direct Plans: SEBI mandates mutual funds to offer direct plans with lower expense ratios, benefiting investors who avoid distributor commissions.

Safeguarding the Well-Being of the Mutual Fund Industry

• Mandating Asset Management Companies (AMCs) to bolster their capital base to Rs. 500 million by 2017, an increase from the existing Rs. 100 million.
• Recommending the examination of compensation details to evaluate the fixed costs of AMCs.
• Regularly conducting stress tests to assess the industry’s resilience under various scenarios.

Future Initiatives

SEBI continues to actively work on new initiatives to further strengthen the Indian mutual fund industry. Some key areas of focus include:

• Strengthening risk management frameworks
• Promoting financial literacy and investor education
• Addressing cyber security risks and technological advancements
• Streamlining regulations for cross-border mutual fund investments

Must-Know Facts About Mutual Funds in India

The landscape of the Indian Mutual Funds industry has witnessed significant transformations over the past six decades. Here are some notable insights into the Indian mutual funds industry:

• India has secured its place as the world’s second-largest mutual fund industry, boasting assets under management exceeding $400 billion.
• Demonstrating remarkable growth, the Mutual Fund industry in India has exhibited a Compound Annual Growth Rate (CAGR) of 17.5% over the last five years.
• 46 million households in India have actively invested in Mutual Funds, showcasing widespread participation in the mutual fund landscape.

Despite the presence of over 40 Fund houses, the dominance of the top 10 Fund houses or AMCs is evident. It collectively manages over 70% of the mutual fund assets in India.

Biggest Mutual Fund Scams in India

While emerging as one of the budding investment options in India, the Indian Mutual Fund industry has a fair share of ‘scams’ that were recorded in Indian history of financial markets. 

UTI Linked Scam

In the early 2000s, some ULIPs faced criticism for high charges and opaque structures, leading to regulatory intervention and changes in product guidelines. In the span of 24 years during its monopoly, UTI successfully cultivated an extensive investor base and managed assets totaling Rs 67 billion, a milestone achieved by 1988. 

Nonetheless, it fell short in establishing a sufficient guarantee. In simpler terms, it lacked the necessary capital to fulfill assured returns to investors in the event of fund withdrawals. Furthermore, it sets the unit price arbitrarily at a price which is more than  the value of actual assets. Additionally, this scam shook investor’s confidence and as a result, they withdrew their investors even before the scam came into limelight. 

Franklin Templeton

Franklin Templeton, a long-standing Mutual Fund company in India, faced difficulties in April 2020 due to the lockdown. The lockdown caused a shortage of money in the markets as people stayed home, and businesses abruptly stopped. 

Because of this lack of money, Franklin Templeton had to shut down six debt mutual fund schemes worth nearly Rs 300 billion. This affected over three lakh investors who, despite choosing low-risk debt schemes, ended up losing their money.

Axis Mutual Fund’s Front-running Fraudulent Scheme

One of the most recent scams in the Mutual Fund industry is the Axis Mutual Fund scam. In May 2022, the seventh-largest Fund house in India dismissed two of its executives over suspicions of engaging in front running.

Front running involves trading stocks based on advance knowledge of transactions that could impact prices. This practice is deemed illegal in India, and SEBI is currently investigating the matter to uncover more details.

Are Mutual Funds Better than Gold and Real Estate?

Boomers often view Gold as a security with enduring value. It also serves as a safe-haven asset, offering a hedge against inflation and economic uncertainties. Thus, the historical stability and the perception of gold as a store of wealth make it an attractive option. Especially, for those seeking a reliable and steady investment, especially in times of economic uncertainty. 

While the current generation enjoys a range of options, including investments in stocks, Mutual Funds, currencies, and private equity. Among these, mutual funds can stand out as a suitable option.

Mutual Funds vs Gold vs Real Estate

Mutual Funds aggregate funds from a diverse investor base to invest in a variety of equity and debt securities. The reason that it can be a preferred investment is because you can start investing from Rs. 500. With a minimum investment of Rs 500, it becomes feasible to allocate a small amount every month. However, this affordability may not be replicated in gold or real estate investments. Given the daily increase in gold prices, acquiring gold or gold jewellery has become an increasingly elusive goal for many. One may encounter a similar challenge in real estate, where acquiring land or investing in property often requires a significant upfront financial commitment. While home loans are an option, the rising interest rates mean it may take years to settle the loan obligations.

However, in terms of liquidity, gold ranks ahead of mutual fund investments. Mutual Funds, while not as liquid as gold, still offer reasonable liquidity, whereas real estate tends to have lower liquidity. Mutual funds can be perceived as relatively riskier due to their investment in marketable securities. However, the potential risks associated with Mutual Funds are often accompanied by the possibility of higher returns. In contrast, gold and real estate are commonly viewed as less risky than Mutual Funds, as their historical values have demonstrated an upward trend with minimal depreciation.

As always, investors must do their own research and/or consult their financial advisor before investing.

Future of Mutual Funds in India

The future of mutual funds in India looks very promising. In the past, there were about 200 different schemes from various institutions, but now that number has increased five times. The availability of different schemes can cater to a wide range of investors. This is based on their investment objectives and risk tolerance. 

Despite challenges like inflation, global central banks tightening liquidity, interest rate hikes, and geopolitical tensions, the mutual fund industry in India showed steady growth.

To Wrap It Up…

The Indian mutual fund industry has come a long way since its inception in 1963. The growth rate of mutual funds in India is highly noticeable across various metrics. It includes the number of fund houses, the variety of schemes, funds mobilized, and assets under management. Initially dominated by UTI mutual funds, the industry has evolved to encompass all three sectors: public sector, private sector, and foreign fund houses.

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