Chapter 1: History of Mutual Funds in India
"Mutual Funds Sahi Hai"
This campaign has been running on all media platforms for years now. We all must have seen celebrities like famous cricketers and movie stars promoting the concept of mutual funds as a great tool for wealth creation for investors in the Indian markets.
In fact, in recent years, the adoption of mutual funds has played a pivotal role in mobilizing the savings of an average Indian investor. Retail investors have been accepting mutual funds as a part of their overall investment portfolio.
This is evident as we examine mutual funds’ rapidly growing AUM (Asset Under Management).
If we look at the data for the past decade, the AUM of the Indian Mutual Fund (MF) Industry has grown from ₹8.26 trillion as of December 31, 2013, to a whopping ₹50.78 trillion as of December 31, 2023.
That’s roughly more than a sixfold increase in 10 years.
Out of this astonishing growth that the mutual fund AUM has witnessed, more than a twofold increase in the AUM was witnessed in just the past five years.
The AUM in December 2018 was around ₹ 22.86 trillion, which grew to ₹50.78 trillion as of December 31, 2023, just in the past five years. Incredible growth, isn’t it?
This shows that the Indian mutual fund industry is growing much faster, thanks to the increased awareness of retail investors who believe in India’s growth story and are adopting mutual funds to fulfill their financial goals.
But this journey has been quite interesting!
Role of Mutual Funds in Shaping the Financial Markets of India.
There is enough evidence that, across the globe, in almost all the major economies, mutual funds have played a dominant role in mobilizing household savings to be invested in the growth of the macroeconomy. No exception for the Indian Economy as well.
In fact, the government took great initiatives in the early 1960s, introducing the concept of mutual funds to Indian investors, which enabled them to participate in the stock markets.
The introduction of mutual funds in India was a great way for small investors to mobilize their savings and get the opportunity to invest in large businesses with small capital.
Not only this, but it gave investors access to a safer way of investing in the markets since mutual funds offered diversification’s core benefit and an opportunity to earn higher returns on their investments.
Credits to all the participants of the Indian mutual fund industry, industries such as the asset management companies (AMCs), mutual fund distributors, financial intermediaries like brokers, and last but not least, our regulatory body SEBI (Securities and Exchange Board Of India), who have played a significant role in establishing one of the most sophisticated ecosystem that we have today.
An individual can invest their savings, which can help them achieve financial freedom,
“Just with a Click of A Button.”
This guide attempts to simplify the complex concepts of mutual funds so that you can use them to mobilize your savings into an asset class. This is by far one of the most lucrative and systematic ways of investing.
But before we dive deeper into the world of Mutual Funds, let’s take a look at the Journey of the Indian mutual fund industry—a glimpse of how this industry has evolved in India.
History of the Indian Mutual Fund Industry.
The Indian Mutual Fund Industry was established to promote financial inclusion and boost the Indian Economy at large.
With this aim, the MF industry has grown in phases. Here’s how the Indian Mutual Fund industry grew over the years.
Stage I: The Starting Point of MFs in India (1963 - 1987)
For the first time, investors in India were introduced to the concept of mutual funds by India’s first mutual fund scheme – UTI 64, in 1964, governed under the UTI Act of 1963 and the purview of the Reserve Bank Of India (RBI).
By 1988, this fund had amassed around 6,000 crores of AUM, helping various investors mobilize their savings.
Stage II: PSUs entering the Mutual Fund Industry (1987 - 1993)
This phase was during the era of globalization. It was a time when the Indian Economy opened its doors to world institutions, which increased attention to the stock markets.
1987 marked the entry of government-sector units such as various public-sector banks, the Life Insurance Corporation of India (LIC), and the General Insurance Corporation of India (GIC).
Key Highlights during this phase:
SBI Mutual Fund was the first ‘non-UTI’ mutual fund established in June 1987, followed by
Canbank Mutual Fund (Dec. 1987)
Punjab National Bank Mutual Fund (Aug. 1989),
Indian Bank Mutual Fund (Nov 1989), Bank of India (Jun 1990),
Bank of Baroda Mutual Fund (Oct. 1992).
LIC established its mutual fund in June 1989, while GIC set up its mutual fund in December 1990.
At the end of 1993, the MF industry had assets under management of ₹47,004 crores.
Stage III: Grand Entry of the Private Players in Indian MF Space (1993 - 2003)
This phase was the most volatile in the Indian markets. After witnessing the biggest bull run, the markets crashed after the famous Harshad Mehta scam. Investors’ confidence was shaken badly, and investors lost their life savings.
However, with the establishment of SEBI, the body responsible for regulating the securities market, investors’ confidence returned. It was also the time when many private sector funds in 1993, and that’s when a new era began in the Indian MF industry, giving Indian investors a wider choice of MF products.
As time passed, SEBI set up some regulations, which were also changed in 1996, making the MF industry robust and deeply regulated.
Stage IV: Phase of Consolidation, Lack of Confidence in MFs post the Sub Prime Crisis (2003 - 2014)
Some major structural changes, such as the government bifurcating two separate entities earlier known as UTI and UTI fund coming under SEBI, led to many mergers by private players.
The entire MF industry was undergoing structural change, and hence, there needed to be more focus on promotions and hardly any growth in AUM in these years. Besides that, many investors almost lost faith in mutual funds after the global financial crisis, which led to a massive fall in the Indian markets.
Now that Indian investors have started redeeming their mutual funds, the future of the MF industry remains uncertain. AMCs also suffered as SEBI abolished the entry load on mutual funds.
All these factors were responsible for slow AUM growth, especially during 2010 and 2013.
Stage V: The Current Phase of MF (2014 - Present)
Fast-forward to this phase, when SEBI introduced several progressive measures in September 2012. These measures started to “re-energize” the Indian Mutual Fund industry and increase MFs’ penetration by early 2014.
Since 2014, the Indian Mutual Fund industry has grown tremendously. Also, the MF industry crossed several key milestones year after year.
As mentioned earlier, the AUM has grown more than sixfold in 10 years, which shows that Indian Investors are adopting mutual funds as a crucial part of their portfolios.
You will be amazed to know that, on average, 14.10 lakh new folios were added every month in the last 5 years since December 2018.
Not only this, but in April 2016, the number of SIPs ( Systematic Investment Plans ) crossed over 1 crore, and as of 31 December 2023, the total number of SIP accounts is 7.64 crore, with a total AUM of ₹50.78 trillion.
And that’s not all. Every single year, on a month-by-month basis, mutual fund AUMs grow much faster.
This only shows that Indian investors believe in the narrative of “ Mutual Fund Sahi Hai,“we have all the reason to believe that in the coming years, every household will have at least one SIP or may be invested in mutual funds.