“Two roads diverged in a wood and I - I took the one less travelled by, and that has made all the difference.”- Robert Frost
The journey of mutual funds in India formally began way back in 1964 with the establishment of a public sector monopolyUnit Trust of India (UTI). It all began as a Government initiative to prod the small investor to savour the benefits of stockmarket investing in an affordable manner and inculcate a habit of financial saving as opposed to physical saving. UTI ex-isted till 2000 after which it was bifurcated into UTI Mutual Fund and Specified Undertaking of UTI, the former being regis-tered with SEBI. SBI Mutual Fund was the first non-UTI mutual fund established in 1987. This was followed by other publicsector mutual funds like Canbank Mutual fund, LIC Mutual Fund, Indian Bank Mutual Fund etc. Since the launching of KothariPioneer Mutual Fund in 1993 as the first private sector mutual fund, the industry has indeed come a long way. SEBI (MutualFunds) Regulations, which came into effect from 1993, detailed specific procedures to be followed for sale, distributionadvertising disclosure, compliance etc. Over the years, particularly in the later part of nineties, the industry has also gonethrough some degree of consolidation through mergers and acquisitions.In this article, various facets of the growth experience of the mutual fund industry are analyzed (
Exchange traded funds and fundof funds are not considered in this article
. Has the industry been successful in carrying forward the objective with which it com-menced? How has it developed and evolved over the years? What have been its unique selling propositions? Are the potentialinvestors spread far and wide across the length and breadth of this country aware of the existence of this industry? Havethe innovative products created by the industry served the purpose of the investors? How has the industry responded to thechallenges and opportunities confronting it? In the course of the analysis attempt is made to explore the answers to some ofthese questions.This article is structured as follows. Section 1 analyzes the importance of mutual funds in the portfolio of the investor vis-à-vis other competing financial products. This section also looks at the international experience in this regard. Section 2 de-liberates on the issues relating to regulation of the mutual fund industry. Section 3 analyzes the salient features of thegrowth of the industry over the last ten years. Using tenure based classification and investment objective based classifica-tion, this section will concentrate on relative performance of various types of mutual funds (open ended, closed ended, eq-uity oriented etc.) in asset mobilization, geographical penetration etc. It also looks at the degree of concentration in theindustry in the last four years. Section 4 deals with an analysis of the unit holding pattern of mutual funds and investmentpattern of mutual funds. Section 5 concludes after flagging various pertinent issues that confront the industry today.
Section 1: Status of the mutual fund industry
The ratio of mutual funds to total gross household savings, in India, increased from 5.5% in 1993-94 to 7.9% in 2007-08. Overthe same period share of deposits with banks have increased from 27.3% to 54.9%, share of insurance funds has increasedfrom 8.7% to 20.1% and pension funds down from 16.7% to 9.5%.
The author is Deputy Director, Ministry of Finance. He would like to acknowledge that discussion with Dr. K.P.Krishnan Joint Secretary,Ministry of Finance, Mr. CKG Nair Director in Ministry of Finance and Mr. Parag Parikh, Chairman Parag Parikh Financial Advisory Ser-vices were helpful in writing this article. Views expressed are personal.
MUTUAL FUNDS– ARE THEY FOR MUTUAL BENEFIT?
By Anupam Mitra*