A Mutual Fund, as the name suggests, is a common fund that collects money from investors who share the same financial objective. The money collected under a fund is further invested into shares, debentures, and other market instruments.
The Government of India along with the Reserve Bank of India established the Unit Trust of India (UTI) in 1963 and introduced the country’s first ever mutual fund. Till the year 1987, the UTI monopolized the mutual fund market in the country. Then the industry began to evolve.
Evolution
- The UTI started out by launching the United Scheme 1964. After 2 decades of its monopolized operation, the organization came to manage a total of assets worth Rs. 6,700 crores.
- The entry of other financial companies in the year 1987 marked the beginning of a new phase in the Indian mutual fund industry. Two major names, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC), set up public sector banks offering mutual fund investments. The State Bank of India was the first of these, with Canbank, Punjab National Bank, Indian Bank, and Bank of Baroda in the queue. The growth and development of these public sector mutual funds led to a massive Rs. 47,004 crores of asset management in the industry.
- The year 1993 witnessed privatization and the arrival of private sector banks. The SEBI Mutual Fund Regulations were implemented for all mutual fund schemes. These were later replaced by the regulations introduced in 1996, which are currently in use. This was the phase wherein foreign funds entered the domestic market.
- The advent of foreign companies led to major reforms in the Indian mutual funds’ industry:
– They introduced innovative functioning methods and improved the standards of service.
– They also instituted advanced technology and knowledge of brokerage.
As a result, the UTI was also propelled to upgrade its work procedure and services.
Structure and Working of Mutual Funds
All mutual fund activities in India are regulated by SEBI, which works in the welfare of the investors’ interests. The organization and working of a mutual fund in India involves the following stakeholders:
- The sponsor(s) or Trust Company: a body that creates the fund. It can be an individual or a group of individuals working as a company.
- The Asset Management Company (AMC): responsible for supervising the funds invested by distributing them into different types of securities. It functions as the fund manager.
- The Custodian: holds the supervision of all the securities that are involved in the fund.
- The Unit Holders: the people who invest in a fund.
Mutual fund schemes first declare their objective and then look for investments directed at this objective. Each investment is translated into “units”.
Performance Evaluation
- In the initial phases of their set up in India, mutual funds were not even close to satisfactory in the returns that they yielded. There was a massive lack of awareness that led to the underperformance of mutual funds.
- After the liberalization of the Indian economy, the UTI delivered high returns to 24 million shareholders in 1992. This resulted in an upsurge of investment in the mutual funds.
- But the 1992 market scandal inflicted major suffering to the mutual fund industry. Many investors disinvested into the secondary market at heavy losses. The absence of transparency in the whole process, thus, discouraged the people from investing in mutual funds.
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Recent Trends
- With the government’s focus on bringing in foreign investments, there has been a much aggressive growth of the foreign mutual fund companies. This has resulted in a setback for the domestic players in the market.
- Recent reports have concluded that mutual funds are an under-tapped market in India. Boston Analytics, a research firm, stated in its reports that investors are reluctant to choose mutual funds as an investment due to lack of information. They hold back their money fearing enormous risk in the mutual funds.
The structural and procedural changes in the industry have made its management more transparent than ever. The private sector offers top mutual funds with lowered risks, facilitated by the use of much better tech architecture. With its focus on areas like IT, pharmaceuticals, and similar, it has been able to mobilize funds in bulk.
Role of Digital Technologies
- Digitization has effectively facilitated asset managers in the mutual funds’ sector. Investors have easy access to asset managers via their smartphones, and social media plays a crucial role in the implementation of marketing strategies and product offerings.
- Predictive analytics has transformed the asset management space via big data and analytics. Cloud computing has enhanced the software model and increased business agility, scalability, and flexibility.
The total number of accounts (or folios) as on July 31, 2018 were 7.55 crore. At the same time, The AUM of the Indian mutual fund industry has grown from ₹5.41 trillion in 2008 to ₹23.06 trillion as of 31st July, 2018, quadrupling in a span of 10 years. Quite clearly, the mutual fund sector in India is undergoing landmark changes in its current phase. Expected it to refine people’s experience with mutual funds, and further establish their trust in this investment option.
