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. This article will explore the growth of mutual funds in India further and discuss facts, performance etc.

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, the 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 mutual fund industry in India witnessed exceptional growth in 2024, with several key metrics reaching new milestones:

• Assets Under Management (AUM): Total AUM crossed Rs. 68.08 lakh cr. in November 2024, marking a 34% increase from Rs. 50.78 lakh cr. in December 2023. This reflects sustained investor confidence and robust inflows across categories.
• Equity Inflows: Equity schemes accounted for approximately 45% of total AUM, standing at Rs. 30.5 lakh cr. as of November. Small-cap and mid-cap funds were notable performers, with their AUMs growing to Rs. 3.26 lakh cr. and Rs. 3.89 lakh cr., respectively.
• SIP Contributions: Monthly Systematic Investment Plan (SIP) contributions rose significantly from Rs. 17,610 cr. in December 2023 to Rs. 25,320 cr. in November 2024, bringing the total SIP inflow for the year to Rs. 2.4 tn.
• Mutual Fund Accounts (Folios): The total number of folios reached 22.08 crore by November, with equity, hybrid, and solution-oriented schemes comprising about 17.55 crore of these accounts.
• Market Performance: The benchmark indices Nifty 50 and Sensex recorded annual gains of 8.8% and 8.2%, respectively, despite global economic challenges. Small-cap and mid-cap indices outperformed significantly, each gaining around 24%.
• Sectoral and Thematic Funds: These funds gained immense popularity, with their AUM rising by 79% to Rs. 4.61 lakh cr., up from Rs. 2.58 lakh cr. in December 2023.

Growth of Mutual Fund Industry in India

The Indian mutual fund industry demonstrated robust growth in 2024, with significant increases in assets under management (AUM) and a rise in investor participation.

Assets Under Management (AUM)

As of 30 November 2024, the industry’s AUM reached Rs. 68.08 tn, more than doubling from Rs. 27.05 tn on 30 November 2019. This reflects a six-fold increase over the past decade, underscoring the sector’s impressive expansion.

Investor Inflows

Systematic Investment Plans (SIPs) remained a preferred choice for retail investors. Monthly SIP contributions rose steadily throughout the year, increasing from ₹17,610 crore in December 2023 to Rs. 25,320 cr. in November 2024. Total SIP inflows for January to November 2024 reached Rs. 2.4 tn, a new record for the industry.

Market Performance

The benchmark indices, Nifty 50 and Sensex, posted annual gains of 8.8% and 8.2%, respectively, marking the ninth consecutive year of growth. However, they lagged behind global peers due to slower corporate earnings and significant foreign outflows. Despite these challenges, equity mutual funds experienced record-high domestic inflows, providing stability to the market.

Sectoral Highlights

The small-cap and mid-cap indices outperformed the benchmarks, each recording gains of approximately 24%. Among sectors, pharmaceuticals led the way with a 39% rise. Other categories gaining traction included defence, mid-cap, small-cap, PSU, and international funds, highlighting the growing diversity within the industry.

Future Outlook

The outlook for the mutual fund industry in 2025 remains positive, supported by strong economic growth and increasing retail investor participation. The net AUM of the industry grew by 39% in 2024, accompanied by a 135% rise in net inflows, signalling sustained momentum.

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 rationalised and capped to prevent excessive investor lock-in.

Enhanced Transparency and Disclosure

• Scheme Information Document (SID): SEBI standardised 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 mn by 2017, an increase from the existing Rs. 100 mn.
• 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 totalling 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 fulfil 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 the limelight. 

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.

Mis-Selling and Commission Scandals

Over the years, some cases of mis-selling mutual funds have come to light, where distributors pushed high-commission products without adequately disclosing risks to investors. SEBI has since capped distributor commissions and mandated that funds disclose total expense ratios (TERs) transparently.

Franklin Templeton Debt Fund Closure (2020)

In April 2020, Franklin Templeton Mutual Fund abruptly shut down six debt fund schemes, affecting Rs. 26,000 cr. worth of investor funds. The closure was attributed to liquidity challenges stemming from the COVID-19 lockdown. However, subsequent investigations revealed governance lapses, inadequate risk management, and questionable investment decisions. The Securities and Exchange Board of India (SEBI) imposed fines and mandated greater disclosures for debt funds to prevent similar incidents.

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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