II M.

Com - Unit –IV – Mutual Funds

Mutual Funds – SEBI Guidelines – Features and types – Management – Structure and
Performance Evaluation – Growth and Recent Trends.

HISTORY OF MUTUAL FUNDS IN INDIA

A strong financial market with broad participation is essential for a developed

economy. With this broad objective India’s first mutual fund was establishment in 1963,
namely, Unit Trust of India (UTI), at the initiative of the Government of India and Reserve
Bank of India ‘with a view to encouraging saving and investment and participation in the
income, profits and gains accruing to the Corporation from the acquisition, holding,
management and disposal of securities’.
Understand the concept of a Mutual Fund
Here’s a simple way to understand the concept of a Mutual Fund Unit.
Let’s say that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the
same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends
then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their
contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit?
Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.
So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the
initial investment of ₹10.
This results in each friend being a unit holder in the box of chocolates that is
collectively owned by all of them, with each person being a part owner of the box.

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What is Mutual Fund?
Mutual Fund is a financial tool used for investing in capital market. It creates a pool of
money by accepting investments from people, be it individuals or corporate houses or
NRIs and invests it in capital market instruments like shares, debentures, stocks etc. The
pool of money is generated from investors who share common financial goal namely
capital appreciation and / or dividend earning. When you invest money in a mutual fund
scheme, you get units of mutual fund as per its NAV i.e. net asset value. Investing in
mutual fund is beneficial as it will help you in diversifying your portfolio; this
investment is backed by professionals who help you take wise investment decisions.
Objectives of Mutual Funds
The primary objective of Mutual funds is to invest in securities that can increase in
value over time, leading to capital gains for investors. They focus on capital appreciation by
investing in stocks of companies with growth potential.
1. Inflation beat returns
The mutual fund scheme should be able to give inflation-beat returns over time. If the
returns on your investment fail to beat inflation, you are losing your investments’ value.
However, mutual funds or other financial instruments may not give good when there is
negative sentiment in the market or due to a pandemic.
2. Preserve capital
Some mutual fund schemes, including debt mutual funds and money market mutual
funds, help you preserve your capital and simultaneously give better returns than fixed
deposits. These funds are suitable for those about to retire or with less risk appetite.
3. Growth
Investing in mutual funds helps you to grow your wealth over time. For example,
growth mutual funds focus on growth stocks as they have the potential to grow in the coming
years. Hence, it gives higher returns than other mutual fund schemes.
4. Generate Income
Mutual funds types like Dividend stocks focused mutual funds help you earn regular
income. Generally, dividend stocks are stable, and there is less risk involved. This mutual
fund is suitable for those looking to earn regular income.

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5. Diversification benefits
Most people invest in mutual funds to get diversification benefits. A diversified
portfolio protects your investment during market volatility or any economic downturn.
Features of Mutual Funds
1. Investment flexibility
This is one of the most appealing features of mutual funds. To invest in mutual funds,
individuals can choose between SIP and lump sum payments.
2. Great for portfolio diversification
Mutual funds can be invested evenly in high and low-risk funds on people’s behalf to
balance one’s profits and losses instead of putting all money into one place. This gives
individuals access to a diverse portfolio that can generate profits even during economic
downturns.
3. Professional operation
To operate mutual funds, every fund house hires experts known as fund managers.
They analyze market trends and invest the money in shares or bonds based on the scheme’s
objectives.
4. Tax benefits
Because of their great tax efficiency, mutual funds are a good long-term investment.
Investing in tax-saving funds while producing large returns might also result in income tax
deductions.
5. Liquidity
In case of an emergency, people can withdraw or redeem money from the fund.
Depending on the scheme, people get the ransom in 3-4 business days in the form of liquid
money. Thus, mutual funds have adequate liquidity, since investors can redeem them at any
moment.
6. Minimal charges
Mutual funds are also accessible to people of all income levels. To invest in mutual
funds, you must pay a tiny fee to your fund companies, known as the expense ratio. The fee
ratio and any extra charges may differ between investment companies. However, the fees are
lower than those of comparable managed funds.

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The Structure of Mutual Funds as per SEBI Guidelines
The Structure of Mutual Funds as per SEBI
The structure of a mutual fund in India, as regulated by SEBI, typically includes the
following entities:
1. Guarantor
This entity provides a guarantee for the investments made by the mutual fund.
However, not all mutual funds have a guarantor, and it is not a mandatory component.
2. Sponsor
The sponsor establishes the mutual fund and obtains SEBI's approval to set up the
fund. They appoint trustees, AMC, and other service providers.
3. Trustee or the Trust
The mutual fund acts under a trust structure, where trustees function as fiduciaries to
oversee the interests of the investors. They monitor the functioning of the mutual fund and
make sure that the regulatory requirements are met.
4. Asset Management Company (AMC)
The AMC manages the operations and investment decisions of the mutual fund. The
trustees appoint them and are responsible for formulating investment strategies, managing the
portfolio, and providing other administrative services.
5. Custodian
The custodian holds and safeguards the securities and other assets of the mutual fund.
They ensure the safekeeping of assets and facilitate the settlement of transactions.
6. Registrar and Transfer Agent (RTA)
The RTA maintains records of investors, processes their transactions, and handles
investor servicing activities like issuance of statements, handling redemptions, and updating
investor details.

SEBI Guidelines for Mutual Funds Investors

SEBI provides guidelines for mutual fund investors to make informed investment decisions.
Here are some key guidelines:

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1. Properly assess your Risk Appetite
Consider your financial goals and risk tolerance before making a mutual fund
investment. Recognize the risks of various fund types and select investments that fit your risk
tolerance.
2. Diversify your Asset Allocation
Invest in various asset classes, including debt, equity, and hybrid funds. By lessening
the influence of any single investment's performance on your portfolio, diversification helps
to reduce risks.
3. Long-Term Investment
Long-term investing objectives are typically better suited for mutual funds. Invest
with a long-term outlook to take advantage of the market's potential development and endure
short-term market swings.
4. Keep your portfolio simple
Be careful to make your portfolio simple enough. Pick a select few funds that fit your
investment objectives and risk appetite. Keeping track of and properly managing your money
is simpler when you have a straightforward portfolio.
5. Do Proper research on the Funds
Do extensive study on the mutual funds you are thinking about. Evaluate their
historical performance, investment strategy, fund manager's track record, expense ratios, and
risk factors. Consider professional advice, read scheme-related documents, and utilize
reliable sources to make informed investment decisions.
Mechanism of Mutual Fund Operation

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1. Investor:
Investor invests in the schemes and receives units for the amount invested. Schemes
act as a pool of investment from different investors, managed by the fund manager.
2. Fund Manager:
The Fund Manager invests in securities as per the mandate and actively manages the
same.
3. Stock Market:
It is a place where shares of pubic listed companies are traded. A stock exchange
facilitates stock brokers to trade company stocks and other securities. A stock may be bought
or sold only if it is listed on an exchange. The securities generate returns based on the market
performances & the weights of the securities determine the returns of the fund.
4. Returns:
The returns are paid to the investor in the form of capital appreciation/dividends
depending on the option of the scheme.
Advantages & Disadvantages of Mutual Funds
Whether you are a seasoned or first-time investor, a mutual fund is something you
should seriously consider adding to your investment portfolio. However, you should be aware
of the advantages as well as possible pitfalls of this investment.

Listed below are the advantages and disadvantages of mutual funds to help you make an
informed decision.

Advantages of Mutual Funds

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1. Liquidity
Unless you opt for Close Ended Mutual Fund, it is relatively easier to buy and exit a
mutual fund scheme. You can sell your units at any point (when the market is high). Do keep
an eye on surprises like exit load or pre-exit penalty. Remember, mutual fund transactions
happen only once a day after the fund house releases that day’s NAV.
2. Diversification
Mutual funds have their share of risks as their performance is based on the market
movement. Hence, the fund manager always invests in more than one asset class (equities
debts, money market instruments etc.) to spread the risks. It is called diversification. This
way, when one asset class doesn’t perform, the other can compensate with higher returns to
avoid the loss for investors.
3. Expert Management
A mutual fund is favoured because it doesn’t require the investors to do the research
and asset allocation. A fund manager takes care of it all and makes decisions on what to do
with your investment. He/she decides whether to invest in equities or debt. He/she also decide
on whether to hold them or not and for how long.
4. Less cost for bulk transactions
You must have noticed how price drops with increased volume when you buy any
product. For instance, if 100g toothpaste costs Rs.10, you might get a 500g pack for, say,
Rs.40. The same logic applies to mutual fund units as well. If you buy multiple units at a
time, the processing fees and other commission charges will be less compared to when you
buy one unit.
5. Invest in smaller denominations
By investing in smaller denominations (SIP), you get exposure to the entire stock (or
any other asset class). This reduces the average transactional expenses – you benefit from the
market lows and highs. Regular (monthly or quarterly) investments, as opposed to lump sum
investments, give you the benefit of rupee cost averaging.
6. Suit your financial goals
There are several types of mutual funds available in India catering to investors from
all walks of life. No matter what your income is, you must make it a habit to set aside some
amount (however small) towards investments. It is easy to find a mutual fund that matches
your income, expenditures, investment goals and risk appetite.

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7. Cost-efficiency
You have the option to pick zero-load mutual funds with fewer expense ratios. You
can check the expenses ratio of different mutual funds and choose the one that fits in your
budget and financial goals. Expense ratio is the fee for managing your fund. It is a useful tool
to assess a mutual fund’s performance.
8. Quick & painless process
You can start with one mutual fund and slowly diversify. These days it is easier to
identify and handpicked fund(s) most suitable for you. Tracking mutual funds will not take
any extra effort from your side. The fund manager with the help of his team, will decide
when, where and how to invest. In short, their job is to beat the benchmark and deliver you
maximum returns consistently.
9. Tax-efficiency
You can invest up to Rs 1.5 lakh in tax-saving mutual funds which is covered under
Section 80C of the Income Tax Act, 1961. Though a 10% tax on Long-Term Capital
Gain (LTCG) is applicable for returns above Rs.1 lakh after one year, they have consistently
delivered higher returns than other tax-saving instruments like FD in recent years.
10. Automated payments
It is common to forget or delay SIPs or prompt lump sum investments due to any
given reason. You can opt for paperless automation with your fund house or agent. Timely
email and SMS notifications help to counter this kind of negligence.
11. Safety
There is a general notion that mutual funds are not as safe as bank products. This is a
myth as fund houses are strictly under the purview of statutory government bodies like SEBI
and AMFI One can easily verify the credentials of the fund house and the asset manager from
SEBI. They also have an impartial grievance redressal platform that works in the interest of
investors.
12. Systematic or One-Time Investment
You can plan your mutual fund investment as per your budget and convenience, for
instance, starting a SIP (Systematic Investment Plan) on a monthly or quarterly basis suits
investors with less money. On the other hand, if you have surplus amount, go for a one-time
lump sum investment.

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Disadvantages of Mutual Fund

1. Costs to manage the mutual fund

The salary of the market analysts and fund manager comes from the investors. Total
fund management charge is one of the first parameters to consider when choosing a mutual
fund. Higher management fees do not guarantee better fund performance.
2. Lock-in periods
Many mutual funds have long-term lock-in periods, ranging from five to eight years.
Exiting such funds before maturity can be an expensive affair. A specific portion of the fund
is always kept in cash to pay out an investor who wants to exit the fund. This portion cannot
earn interest for investors.
3. Dilution
While diversification averages your risks of loss, it can also dilute your profits.
Hence, you should not invest in more than seven to nine mutual funds at a time. As you have
just read above, the benefits and potential of mutual funds can undoubtedly override the
disadvantages, if you make informed choices. However, investors may not have the time,
knowledge or patience to research and analyze different mutual funds. Investing with Clear
Tax could solve this as we have already done the homework for you by handpicking the top-
rated funds from the best fund houses in the country.

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4. Fluctuating Returns
Mutual funds are subject to market risks. The trends in the market can vary from time
to time; hence, there are no fixed returns that mutual funds may offer. Moreover, the value of
mutual fund investments may also decrease or increase with time. Such changes in the market
can be managed by the fund managers who keep a complete track of the changing market
trends.
Types of Mutual Funds

I. Based on Structure
Mutual funds are also categorized based on different attributes (like risk profile, asset
class, etc.). The structural classification – open-ended funds, close-ended funds, and interval
funds – is quite broad, and the differentiation primarily depends on the flexibility to purchase
and sell the individual mutual fund units.

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1. Open-Ended Funds
Open-ended funds do not have any particular constraint such as a specific period or
the number of units which can be traded. These funds allow investors to trade funds at their
convenience and exit when required at the prevailing NAV (Net Asset Value). This is the sole
reason why the unit capital continually changes with new entries and exits. An open-ended
fund can also decide to stop taking in new investors if they do not want to (or cannot manage
significant funds).
2. Closed-Ended Funds
In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund
company cannot sell more than the pre-agreed number of units. Some funds also come with
a New Fund Offer (NFO) period; wherein there is a deadline to buy units. NFOs come with
pre-defined maturity tenure with fund managers open to any fund size. Hence, SEBI has
mandated that investors be given the option to either repurchase option or list the funds on
stock exchanges to exit the schemes.

II. Based on Investment Objective

1. Equity Funds
Equity funds primarily invest in stocks, and hence go by the name of stock funds as
well. They invest the money pooled in from various investors from diverse backgrounds into
shares/stocks of different companies. The gains and losses associated with these funds
depend solely on how the invested shares perform (price-hikes or price-drops) in the stock
market. Also, equity funds have the potential to generate significant returns over a period.
Hence, the risk associated with these funds also tends to be comparatively higher.
i).Index Funds
Suited best for passive investors, index funds put money in an index. A fund manager
does not manage it. An index fund identifies stocks and their corresponding ratio in the
market index and put the money in similar proportion in similar stocks. Even if they cannot
outdo the market (which is the reason why they are not popular in India), they play it safe by
mimicking the index performance.

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ii).Dividend Yield Funds
Certain mutual funds offer high returns to their investors in the form of dividends yielded by
the shares. These funds invest only in corporations that have significantly high dividend
yielding stocks, thereby enabling the fund managers to extract the maximum value out of
their investments. Suitable For: Investors who have advanced knowledge of macro trends
and prefer to take selective bets for higher returns compared to other Equity funds. At the
same time, these investors should also be ready for possibility of moderate to high losses in
their investments even though overall market is performing better.
iii). Equity Diversified Funds (Multi Cap Equity Funds)
They invest in stocks of companies across the stock market regardless of size and
sector. These funds provide the benefit of diversification by investing in companies spread
across sectors and market capitalization. They are generally meant for investors who seek
exposure across the market and do not want to be restricted to any particular sector. They
invest in companies across different market caps and hence reduce the amount of risk in the
fund. Diversification helps prevent events that could affect a single sector for affecting the
fund, and hence reduce risk. It is ideal for the investors who are seeking returns above Large
Cap funds over a long-term Horizon. i.e. 5 years or more. Diversified Funds invest in large
cap as well as mid and small caps. The proportion may vary as per funds strategy.
iv). Thematic Equity Funds
These funds invest in securities of specific sectors such as Information Technology (IT),
Banking, Service and pharma sector etc., which is specified in their scheme information
documents. So, the performance of these schemes depends on the performance of the
respective sector. These funds may give higher returns, but they also come with increased
risks.

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v).Sector Fund
Sector funds invest solely in one specific sector, theme-based mutual funds. As these
funds invest only in specific sectors with only a few stocks, the risk factor is on the higher
side. Investors are advised to keep track of the various sector-related trends. Sector funds also
deliver great returns. Broadly speaking, sector funds can be classified into the following
types:
 Real Estate Funds – which allow investors with a small investible corpus to
participate in the real estate market?
 Utility Funds – which invest in well-performing companies from the utility
sector and are usually focused towards offering steady dividends?
 Natural Resources Funds – which are focused on investing in companies from
the oil and natural gas, energy, forestry, and timber-related industries?
 Technology Funds – which allow investors to gain exposure to the technology
sector?
 Financial Funds – which invest primarily in companies from the financial
industry like banking, insurance, accounting firms, etc.
 Communications Funds – which focus on investing in the telecommunications
sector and often include internet-related companies too?
 Healthcare Funds – which cover companies and for-profit medical institutions
like pharmaceutical companies, path lab chains, etc.
 Precious Metals Funds – which offer the investors exposure to various
precious metals like gold, platinum, silver, copper, and palladium?
 Some sector funds also focus on a specific sub-sector of the economy like
Banking, Energy, etc.

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v). Tax-savings funds (ELSS funds)
Tax-savings funds or better known as ELSS funds (Equity Linked Savings Schemes)
comes with a lock-in of three years, and qualifies for deduction up-to INR 2 lakh under
Section 80C of the Income Tax Act, in the year of investment. They function like any other
mutual funds. The amount you invest in ELSS is deducted from your taxable income, which
helps you lower the amount of income tax you are liable to pay. Investments in ELSS are
subject to a three-year lock-in period and the returns from the scheme, i.e. dividends and
capital gains, are tax-free.
2. Balanced Funds (or) Hybrid Fund
A balanced fund, also known as a hybrid fund, is characterized by diversification
among two or more asset classes. A balanced fund usually combines stock and bond
components in a diversified portfolio. Balanced funds typically follow a 60% stock and 40%
bond asset allocation. The other types of hybrid funds are Monthly Income Plans (MIPs) and
Arbitrage funds. For the purpose of understanding, let’s look at different types of
hybrid/balanced funds available in the market.
i).Equity Oriented Balanced Funds
In the normal jargon, a balanced fund refers to the funds where 65% or more of the

fund is invested in equity. As explained above, the equity orientation is more than being just a
50:50 break-up of funds between equity and debt.

ii). Debt-Oriented Balanced Funds

A debt oriented mutual fund is a mutual fund scheme that invests in fixed income
instruments, such as bonds issued by the government and corporate, debt securities, and
money market instruments, etc. These mutual funds are a popular investment option and are
great for investors who do not have a huge risk appetite but want steady returns. Debt mutual
funds are referred to as fixed-income securities as the investor is aware of the returns to be
received from the investment right from the time of the investment. These funds are insulated
from market volatility and therefore considered less risky than equity funds. Debt oriented
mutual fund offers tax benefits as well which makes them a popular investment option.

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3. Debt Funds
Debt Funds invest primarily in fixed-income securities such as bonds, securities and
treasury bills. They invest in various fixed income instruments such as Fixed Maturity Plans
(FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly
Income Plans, among others. Since the investments come with a fixed interest rate and
maturity date, it can be a great option for passive investors looking for regular income
(interest and capital appreciation) with minimal risks.
i). Liquid Funds
Like income funds, liquid funds also belong to the debt fund category as they invest in
debt instruments and money market with tenure of up to 91 days. The maximum sum allowed
to invest is Rs 10 lakh. A highlighting feature that differentiates liquid funds from other debt
funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for
365 days (including Sundays) while for others, only business days are considered.
ii).Gilt Fund
Gilt funds are debt funds that invest in government securities. The government bonds
used to be issued in golden-edged certificates. Investors should keep in mind that since these
schemes invest in government securities, they have zero default risk.
iii). Income Funds:
Such funds invests in Fixed income instruments like bonds, debentures with a purpose
of giving good returns to investors with zero to less risk. Income funds belong to the family
of debt mutual funds that distribute their money in a mix of bonds, certificate of deposits and
securities among others. Helmed by skilled fund managers who keep the portfolio in tandem
with the rate fluctuations without compromising on the portfolio’s creditworthiness, income
funds have historically earned investors better returns than deposits. They are best suited for
risk-averse investors with a 2-3 years perspective.
iv). Fixed Maturity Plans (FMPs)
Many investors choose to invest towards the of the FY ends to take advantage of
triple indexation, thereby bringing down tax burden. If uncomfortable with the debt market
trends and related risks, Fixed Maturity Plans (FMP) – which invest in bonds, securities,
money market etc. – present a great opportunity. As a close-ended plan, FMP functions on a
fixed maturity period, which could range from one month to five years (like FDs). The fund
manager ensures that the money is allocated to an investment with the same tenure, to reap
accrual interest at the time of FMP maturity. The basic objective of FMPs is to seek steady
returns over a fixed period, aiming to protect investors against market fluctuations.

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v). Floating Rate Funds
As the name suggests, these funds primarily invest instruments that offer a floating interest
rate. The primary objective of the fund is to minimize the volatility of investment returns.
Floating rate securities are linked to a benchmark rate for debt instruments such as MIBOR.
(MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call
money market. It is the rate at which banks borrow unsecured funds from one another in the
interbank market. ) The interest rate is reset periodically based on the interest rate movement.
Accordingly, the returns vary.
vi).Arbitrage Funds
These are equity-oriented mutual funds that use the arbitrage strategy, which intends

to benefit from the spread between spot and future prices of stocks in the cash and the

derivatives market. The fund manager actively looks for profit opportunities arising from this
difference in pricing between two markets. In case no such opportunities are available,

arbitrage funds tend to invest in the money market instruments or cash and cash equivalents.
vii). Monthly Income Plans (MIPs)
Monthly income plans fall under the hybrid mutual fund category, and they are
essentially debt-oriented. Meaning, the majority of the portfolio is invested in debt and
money market instruments, which is why MIP is a moderate-risk scheme. Investors have the
luxury of liquidity while having a regular inflow of dividends. However, MIPs are not
something that generates a steady and fixed monthly income as the name indicates. Like any
market-linked investment tool, dividends are paid out based on profits.

What is an Asset Management Company?

Asset management companies (AMCs) are firms pooling investments from various
individual and institutional investors. The company manages the investment by investing in
capital assets such as stocks, real estate, bonds, and so on. The asset management
companies have professionals called fund managers who decide where the pooled money is
invested. Fund managers identify the investment options that are in line with the objectives of
the investors.

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 The fund manager first evaluates various metrics such as market and industry risks,
before making a decision that is in line with the investment goals. For instance, a debt fund
invests mostly in bonds and government securities (GILT EDGED SECURITIES) to keep
the risks minimal. But an equity fund mainly focuses on equities (shares) of companies. The
ultimate aim here is to make profitable investment decisions that will give investors
maximum returns.

Growth of Mutual Fund industry in India

The mutual fund industry in India has witnessed remarkable growth over the past few
decades. Here are some key points regarding the growth of the mutual fund industry in India:
1. Assets Under Management (AUM) Growth: The total Assets Under Management (AUM)
of the Indian mutual fund industry has grown exponentially. From just Rs. 47,004 crore (US$
6.3 billion) in March 1995, the AUM has increased to around Rs. 40.6 trillion (US$ 498
billion) as of December 2022, a compound annual growth rate (CAGR) of approximately
17% over the past 27 years.
2. Number of Schemes: The number of mutual fund schemes in India has increased
significantly over the years. As of December 2022, there were around 2,096 mutual fund
schemes in India, offering a wide range of investment options across different asset classes
and investment styles.
3. Investor Base Expansion: The mutual fund industry has witnessed a substantial increase in
its investor base. The number of investor accounts or folios has grown from around 1.7 crore
in March 2000 to over 13.4 crore as of December 2022. This indicates that mutual funds have
become more accessible and attractive to retail investors over time.
4. Systematic Investment Plans (SIPs): The growth of Systematic Investment Plans (SIPs) has
been a driving force behind the industry's expansion. SIPs have made mutual fund
investments more affordable and accessible to small investors, encouraging disciplined
investment habits. The monthly SIP contribution has grown from around Rs. 1,000 crore in
April 2009 to over Rs. 13,600 crore in December 2022.
5. Regulatory Reforms: The Securities and Exchange Board of India (SEBI) has implemented
various regulatory reforms over the years to enhance transparency, investor protection, and
overall governance of the mutual fund industry. These reforms have played a crucial role in
boosting investor confidence and driving the industry's growth.

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6. Financial Literacy and Awareness: Increased financial literacy and investor awareness
campaigns by mutual fund houses, regulatory bodies, and other stakeholders have played a
significant role in the industry's growth. These efforts have helped demystify mutual funds
and attracted more investors to participate in the industry.
7. Fintech and Digital Platforms: The rise of financial technology (fintech) and digital
platforms has made it easier for investors to access and invest in mutual funds. Online
platforms, mobile apps, and digital investment advisors have facilitated seamless transactions
and enhanced the overall investor experience, contributing to the industry's growth.
The mutual fund industry in India has emerged as a vital component of the country's
financial system, providing diverse investment opportunities to a growing number of
investors. With continued regulatory support, investor education, and technological
advancements, the industry is expected to maintain its growth trajectory in the coming years.

India Mutual Fund Industry - Growth, Trends, COVID-19 Impact, and Forecasts
(2022 - 2027)
As a result of COVID-19-induced lockdowns, the mutual fund industry's SIP
collections fell by 4% to Rs 96,000 crore in the 2020-21 fiscal years, resulting in income
uncertainty. Many investors chose to halt their SIPs as a result of the coronavirus epidemic,
which resulted in lockdowns in March 2020 and raised income uncertainty. The decline in
SIP inflows after March 2020 demonstrated this. From a peak of Rs 8,641 crore, the
contribution fell for 11 months in a row before breaking through to new highs.

The Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for
the month of February 2022 stood at ₹ 38,56,140 crore. The Industry’s AUM had crossed the
milestone of ₹10 Trillion (₹10 Lakh Crore) for the first time in May 2014 and in a short span
of about three years, the AUM size had increased more than two folds and crossed ₹ 20
trillion (₹20 Lakh Crore) for the first time in August 2017. The AUM size crossed ₹ 30
trillion (₹30 Lakh Crore) for the first time in November 2020. The Industry AUM stood at
₹37.56 Trillion (₹ 37.56 Lakh Crore) as on February 28, 2022.

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 Digital penetration, government targeting smart cities and increased data speeds are
also facilitating the drift of asset share towards smaller cities and towns. Increased retail
contribution through SIPs shows the power of digital penetration in India.

Performance of Mutual Fund

The mutual fund industry in India has witnessed significant growth over the past few
decades. Here's an overview of the performance of the mutual fund industry in India:
1. Assets under Management (AUM): The total Assets under Management (AUM) of the
Indian mutual fund industry have grown substantially over the years. As of December 2022,
the total AUM of the Indian mutual fund industry stood at approximately Rs. 40.6 trillion
(US$ 498 billion), making it one of the largest in the world.
2. Industry Growth: The Indian mutual fund industry has experienced a compound annual
growth rate (CAGR) of around 17% in terms of AUM over the past decade. The industry has
expanded its investor base, with the number of folios (investor accounts) increasing from
around 4.9 crore in March 2014 to over 13.4 crore as of December 2022.
3. Equity Funds: Equity-oriented mutual funds, which invest primarily in stocks, have been a
significant driver of the industry's growth. Over the past decade, equity funds have witnessed
strong inflows and have consistently outperformed traditional investment avenues like bank
deposits and fixed income instruments.
4. Debt Funds: Debt funds, which invest in fixed-income securities like bonds and government
securities, have also seen substantial growth in AUM over the years. However, their
performance has been more volatile compared to equity funds, owing to fluctuations in
interest rates and credit risks.
5. Systematic Investment Plans (SIPs): The concept of Systematic Investment Plans (SIPs),
where investors can invest a fixed amount periodically in mutual funds, has gained popularity
in India. SIPs have helped in bringing in retail investors and promoting disciplined
investment habits.
6. Investor Awareness: Increased investor awareness and education, coupled with regulatory
reforms and the growth of financial technology (fintech), have contributed to the industry's
growth. However, mutual fund penetration in India is still relatively low compared to other
developed markets, suggesting potential for further growth.

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7. Regulation and Governance: The Securities and Exchange Board of India (SEBI) is the
primary regulator for the mutual fund industry in India. SEBI has implemented various
measures to enhance transparency, investor protection, and overall governance of the mutual
fund industry.
Overall, the mutual fund industry in India has experienced remarkable growth and has
emerged as a vital component of the country's financial system, providing investment

opportunities to a wide range of investors.

Recent Trends in Mutual Fund Industry in India
Here are some recent trends observed in the mutual fund industry in India:
1. Surge in Passive Investing: There has been a growing interest in passive investing
strategies, such as index funds and exchange-traded funds (ETFs), among Indian investors.
These funds aim to replicate the performance of benchmark indices like the Nifty or Sensex,
offering low-cost and transparent investment options.
2. Rise of ESG Funds: Environmental, Social, and Governance (ESG) investing has gained
traction in India. Several asset management companies have launched ESG-themed mutual
funds, catering to investors seeking sustainable and socially responsible investment options.
3. Focus on Direct Plans: Direct plans, which allow investors to invest directly with the mutual
fund house without involving a distributor or broker, have become more popular. Direct plans
typically have lower expense ratios, making them more cost-effective for investors.
4. Growth of Debt Funds: Debt funds, which invest in fixed-income instruments like bonds
and government securities, have witnessed substantial growth in recent years. Investors have
been attracted to debt funds due to their relatively lower risk profile compared to equity funds
and the potential for regular income.
5. Rise of Equity-Linked Saving Schemes (ELSS): Equity-Linked Saving Schemes (ELSS),
which offer tax benefits under Section 80C of the Income Tax Act, have gained popularity
among investors seeking tax-saving investment options. ELSS funds have seen a surge in
inflows in recent years.
6. Emphasis on Investor Education: Mutual fund houses, industry associations, and regulatory
bodies have placed greater emphasis on investor education and awareness. Initiatives such as
investor awareness campaigns, online educational resources, and investor workshops have
aimed to enhance financial literacy and attract more investors to the industry.

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7. Adoption of Technology: The mutual fund industry has embraced technology to improve
investor experience and operational efficiency. Mobile apps, digital platforms, and robo-
advisory services have become more prevalent, catering to the changing preferences of
investors, particularly the younger generation.
8. Consolidation and Restructuring: The Indian mutual fund industry has witnessed
consolidation, with mergers and acquisitions of smaller asset management companies by
larger players. Additionally, some fund houses have restructured their product offerings to
streamline their operations and focus on their core strengths.
9. Focus on Retirement Planning: With an aging population and increasing awareness of the
importance of retirement planning, mutual fund houses have introduced specialized
retirement funds and target-date funds to cater to the long-term investment needs of investors.
These trends highlight the evolving nature of the mutual fund industry in India, reflecting
changing investor preferences, regulatory developments, and technological advancements.

Evaluation of Mutual Fund Industry in India

Evaluating the performance and development of the mutual fund industry in India involves
analyzing various aspects, including assets under management, investor base, product
offerings, regulatory environment, and investor education. Here's an evaluation of the Indian
mutual fund industry:
1. Assets Under Management (AUM) Growth: The Indian mutual fund industry has
witnessed remarkable growth in terms of AUM, which currently stands at around Rs. 40.6
trillion (US$ 498 billion) as of December 2022. This exponential growth can be attributed to
several factors, including increased investor participation, regulatory reforms, and the
industry's ability to cater to diverse investment needs.
2. Expansion of Investor Base: The industry has successfully expanded its investor base, with
the number of investor accounts (folios) growing from around 1.7 crore in March 2000 to
over 13.4 crore as of December 2022. This surge in investor participation can be credited to
increased financial literacy, investor awareness campaigns, and the rise of systematic
investment plans (SIPs), which have made mutual fund investments more accessible to a
broader audience.

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3. Diversification of Product Offerings: The Indian mutual fund industry has evolved to offer
a wide range of investment options across different asset classes, investment styles, and risk
profiles. This diversification has allowed investors to align their investments with their
financial goals, risk appetites, and investment horizons. However, there is still room for
further innovation in product offerings to cater to the evolving needs of investors.
4. Regulatory Environment: The Securities and Exchange Board of India (SEBI) has played a
crucial role in shaping the regulatory landscape for the mutual fund industry. SEBI's
initiatives, such as enhancing transparency, investor protection, and governance standards,
have contributed to building investor confidence and driving the industry's growth. However,
some areas, such as the taxation of mutual fund investments and the regulatory framework for
new investment vehicles like ETFs, may require further attention.
5. Investor Education and Awareness: The mutual fund industry, along with regulatory
bodies and other stakeholders, has made significant efforts to enhance investor education and
awareness. However, there is still a need for more concerted efforts to reach a broader
audience, especially in Tier 2 and Tier 3 cities, to promote financial literacy and demystify
mutual fund investments.
6. Technological Advancements: The industry has embraced technology to improve investor
experience, enhance operational efficiency, and reach a wider audience. However, there is
still room for further adoption of emerging technologies like artificial intelligence, big data
analytics, and block chain to streamline processes, reduce costs, and provide personalized
investment solutions.
7. Cost and Fee Structure: The expense ratios and fee structures of mutual funds in India have
been a subject of discussion. While the industry has made efforts to reduce costs through
direct plans and passive investment strategies, there is still scope for further cost
optimization, especially for actively managed funds, to enhance value for investors.
Overall, the Indian mutual fund industry has made significant strides in terms of
AUM growth, investor participation, product diversification, and regulatory oversight.
However, there are areas, such as investor education, technological adoption, and cost
optimization that require continued focus and improvement to ensure the industry's
sustainable growth and better alignment with investor interests.

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