Understanding the History of Mutual Funds in India

Mutual Funds in India

The average retail investor is becoming increasingly aware of the investment options available today. Consequently, the financial markets in India are witnessing rising investor participation — particularly in the mutual fund industry. Data from the Association of Mutual Funds in India (AMFI) shows us that the Assets Under Management (AUM) of the country’s mutual fund industry grew more than 6x in just 10 years — from ₹7.46 trillion in September 2013 to ₹46.58 trillion in September 2023. We also have around 44 asset management companies registered in India today.

The industry may be thriving today, but have you wondered about the history of mutual funds in India? When was the first mutual fund company established? And what was the journey from those humble beginnings like? 

You’ll find the answers to all these questions and more in this article. 

A Detailed History Of Mutual Funds In India

The history of mutual funds in India can be traced back to the early 1960s. So, as of 2023, India’s mutual fund industry is only around six decades old. However, the journey of growth in these sixty years has been nothing short of remarkable, as you’ll see in the timelines outlined below. More specifically, the history of mutual funds in the country can be divided into five phases, as follows.

1. The First Phase (1964 to 1987): Establishment of the Unit Trust of India (UTI)

The first phase in the Indian history of mutual funds can be traced back to 1963, with the formation of the Unit Trust of India (UTI). This was jointly set up by the Government of India and the Reserve Bank of India (RBI). The Unit Scheme 1964 was the first scheme that the UTI launched. It was considered an essential investment for retail investors who were capable of taking on a certain amount of risk. 

A few years after the Unit Trust of India was set up, the responsibility for regulating the UTI passed from the RBI to the Industrial Development Bank of India (IDBI) in 1978. Still, the Unit Trust of India continued to enjoy a monopolistic presence for nearly a decade more, till 1987. By the end of 1988, which was when the second phase in the history of mutual funds was underway, the UTI had Assets Under Management (AUM) worth ₹6,700 crores. 

2. The Second Phase (1987 to 1993): The Introduction of Public Sector Mutual Funds

After over two decades of a monopolistic setup, the Indian mutual fund industry was opened up to public sector banks and entities in 1987. The period from 1987 to 1993 in the history of mutual funds was marked by rapid expansion and growth, with the State Bank of India leading the race to launch new non-UTI mutual funds in the country. 

Some of the notable public sector mutual funds that were established during the second phase of the industry are listed below. 

By the end of the second phase in India’s history of mutual funds, the industry had expanded exponentially, thanks to the entry of public sector entities. Since investors in India placed a great deal of trust in PSU banks and insurance companies like the LIC and the GIC, the AUM of the mutual fund industry grew to over ₹47,000 crores by the end of 1993. 

3. The Third Phase (1993 to 2003): The Launch of Private-Sector Mutual Funds

The third phase in India’s history of mutual funds was aligned with the establishment of the Securities and Exchange Board of India (SEBI) in April 1992. With SEBI regulating the Indian financial markets and protecting investors’ interests, the time was ripe for the mutual fund industry to expand further into a new era — with the entry of private-sector mutual funds. 

This was made possible in 1993 when SEBI introduced the initial set of mutual fund regulations in India. The presence of a regulatory framework bolstered investor confidence and empowered them to take advantage of the wider range of MF choices available in the industry. 

The first private-sector mutual fund scheme was registered in India in July 1993 by Kothari Pioneer. Today, the mutual fund house has merged with Franklin Templeton Mutual Funds. This was followed by the introduction of several other private-sector mutual fund schemes. To further regulate the market and safeguard investors, SEBI revised the mutual fund regulations in 1996, making them more comprehensive and aligning them with the requirements of the fast-expanding industry. 

By January 2003, which marked the end of this third phase in the history of mutual funds, the MF industry consisted of 33 mutual fund schemes with a total AUM of ₹1,21,805 crores. UTI’s share in this AUM came out to over ₹44,540 crores. 

4. The Fourth Phase (2003 to 2014): Consolidation and Slackening Growth

This phase in the history of mutual funds in India began with the repealing of the Unit Trust of India Act, 1963. The UTI was split into the following two entities as a result of this:

• The Specified Undertaking of Unit Trust of India (SUUTI)
• The UTI Mutual Fund 

This era was further characterised by rising consolidation resulting from the bifurcation of UTI and numerous mergers among private sector funds. However, the global meltdown of 2009 cast its shadow over international securities markets, and India was not immune to this. 

Many investors who had ventured into the capital market at its peak faced significant financial setbacks. As a result, their trust in mutual fund products wavered substantially. 

Navigating through the effects of the global financial crisis, the Indian mutual fund industry grappled to reinvent itself and regain its earlier momentum. The efforts were evident, yet the results were gradual, as reflected in the slow growth in the industry’s AUM from 2010 to 2013.

5. The Fifth Phase (May 2014 Onward): Transformation and Improved Penetration

The fifth phase in the history of mutual funds in India, which began in May 2014, marked a transformative period for the industry. Recognising the need to expand the reach of mutual funds, especially into Tier II and Tier III cities, SEBI had earlier laid down progressive measures since September 2012. These reforms, combined with a supportive central government, set the stage for a resurgence in the MF landscape.

The growth trajectory was exponential. The industry’s AUM grew from ₹10 trillion in May 2014 to cross the staggering ₹30 trillion mark by November 2020. By the close of August 2023, this figure stood at ₹46.63 trillion, marking a six-fold growth within a decade.

Two primary factors contributed to this transformation, as outlined below. 

• The regulatory impetus provided by SEBI’s 2012 measures to rejuvenate the MF industry
• The efforts of mutual fund distributors

These distributors not only bridged the gap between investors and the industry, especially in smaller towns but also played a pivotal role in navigating investors through market uncertainties and educating them about the merits of mutual funds. Furthermore, these distributors were instrumental in popularising Systematic Investment Plans (SIP). By August 2023, the number of SIP accounts had grown to an impressive 6.97 crore, up from just 1 crore in April 2016.

One campaign that stands out during this phase in the history of mutual funds is the ‘Mutual Funds Sahi Hai’ initiative. Launched by the Association of Mutual Funds in India (AMFI) in 2017, this campaign aimed at demystifying mutual funds for the average Indian. By using simple language and relatable scenarios, the campaign sought to address common misconceptions about mutual funds and highlight their benefits.

The phrase ‘Sahi Hai,’ which translates to ‘It’s Right’ in English, successfully conveyed the message that mutual funds are a suitable investment avenue for a diverse range of investors — no matter what their financial goals or risk appetites may be. Through TV commercials, radio spots and digital campaigns, the AMFI reinforced the idea that mutual funds offer flexibility, diversity and potential for growth. The aftermath of the campaign’s launch witnessed a surge in the number of first-time investors entering the mutual fund space. 

Thus, this phase can be best described as a period of transformative growth and enhanced penetration, fueled by strategic reforms and the dedication of industry stakeholders.

The Way Forward: What the Future of Mutual Funds in India Looks Like

The future for mutual funds in India looks bright. As more people learn about and use mutual funds and technology makes it easier to invest, we can expect even more growth. With new rules and a growing interest in different investment options, mutual funds will likely become a common choice for many Indians looking to grow their money.

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