Did you know that by September 2023, over 6.6 crore Indians have invested in mutual funds, with assets under management reaching ₹40 lakh crore? Mutual funds have changed how people in India grow their money and build long-term wealth. In this article, we will explore the history of mutual funds, their journey, and how they have shaped the financial system in India. Whether you’re a new or experienced investor, this story will help you understand why mutual funds are so necessary today
Introduction
A mutual fund is an investment vehicle where money from multiple investors is pooled together to purchase a variety of securities, such as stocks, bonds, and gold. It is managed by a professional fund manager who makes decisions on when to buy or sell these securities.
Since the introduction of mutual funds in India, they have significantly transformed the financial landscape for many Indians. Historically, the Reserve Bank of India (RBI) launched the first mutual fund in 1963, called the Unit Trust of India (UTI). By 1998, over 25 million investors had adopted mutual fund schemes. Mutual funds have historically provided annualized returns ranging from 9-22%.
Mutual funds offer numerous benefits, from diversification to tax savings, and provide greater liquidity compared to real estate, which is a popular but less flexible investment option in India. They also accommodate different investment amounts, making them accessible to retail investors across income levels. Systematic Investment Plans (SIPs) allow individuals to invest small amounts regularly, encouraging disciplined savings habits.
Mutual funds have played a crucial role in the creation of wealth for Indians. Over the past few decades, the industry has experienced exponential growth, with assets under management (AUM) surpassing ₹40 lakh crore in 2023. Increasing awareness and the convenience of investing through online platforms have further driven retail participation in the market.
While mutual funds have significantly impacted India’s financial ecosystem, the concept initially evolved from global markets. In this article, we will take a closer look at the history of mutual funds in India to understand how they have transformed the creation of wealth for Indians over the years.
The Origins Of Mutual Funds Globally
Brief History Of Mutual Funds In The Global
In the 18th century, a Dutch merchant named Adriaan van Ketwich came up with the idea of diversifying investments across various securities to minimize risk. In 1774, he established the first pooled investment, called Eendragt Maakt Magt, which translates to “Unity Creates Strength.” This concept of diversification remains a core principle in mutual funds today. This has laid the foundation for the mutual fund industry globally.
From there, mutual funds gained popularity in developed countries like the United States and the United Kingdom during the 20th century. The first modern mutual fund, the Massachusetts Investors Trust, was established in Boston in 1924. The concept of spreading risk across various investments flourished, making mutual funds accessible to average investors. The US government introduced regulations, such as the Investment Company Act of 1940, which provided a legal framework for mutual funds, ensuring transparency and protecting investors. These regulatory developments, combined with growing interest from the middle class, helped the mutual fund industry increase in developed markets. By the late 20th century, mutual funds had become a popular investment choice for retail investors across many developed countries.
Global Insights Shaping India’s Mutual Funds
Just like the US market introduced the Investment Company Act to ensure transparency, India’s Securities and Exchange Board of India (SEBI) established comprehensive mutual fund regulations in 1996. One significant impact of global mutual funds on India was the introduction of the Systematic Investment Plan (SIP). This simple mechanism gained immense popularity among Indian investors as well. Today, SIP inflows have grown significantly, with monthly contributions crossing ₹15,000 crore as of September 2023, reflecting the widespread adoption of disciplined investment habits among Indian retail investors. Here Below is the graph showing the SIP inflows year on a yearly basis
Image caption: Year-on-year SIP inflows in India from 2018 to 2023 showing significant growth in investor participation. (Source)
Alt text: A line graph displaying the year-on-year SIP inflows in India from 2018 to 2023, with an upward trend in contributions, reaching ₹15,000 crore in 2023.
The Growth Phases of Mutual Funds in India
As we delve deeper into the evolution of mutual funds in India, it’s essential to understand the key phases that shaped the industry. There are four different phases of the dominance of UTI in its early years, from the entry of public sector banks and eventually private players; each phase brought unique changes that expanded the mutual fund landscape, creating more opportunities for retail investors.
First Phase UTI Dominance
In 1963, the Unit Trust of India (UTI) was established under the guidance of the Reserve Bank of India, making it the first mutual fund in India. For nearly two and a half decades, UTI held a monopoly in the mutual fund industry. Its main goal was to mobilize small savings and introduce them to the capital markets. One of its popular schemes was the Unit Scheme 1964 (US-64), which became a viable investment option for many investors. Until the late 1980s, UTI provided a range of assets, including equities, bonds, and government securities, helping investors diversify their portfolios.
Second Phase:Entry of Public Sector Mutual Funds
By the end of 1987, UTI’s monopoly in the mutual fund space came to an end as financial institutions were permitted to set up their mutual funds. This development reshaped the mutual fund industry in India, providing investors with a wide range of new options due to the entry of various players. The increased competition among fund houses gave investors more choices, boosting the overall growth and diversification of the industry.
The first public sector institutions to set up mutual funds in India were the State Bank of India (SBI), Canara Bank, and the Life Insurance Corporation of India (LIC). These institutions brought credibility and trust, attracting retail investors who were already familiar with banks and insurance companies. This phase laid the foundation for the rapid expansion of mutual funds in India, offering schemes tailored to various risk profiles and catering to both conservative and growth-oriented investors.
Third Phase: Entry of Private Sector Mutual Funds
During the period of liberalization in India, the Securities and Exchange Board of India (SEBI) introduced new regulations, opening the door for private-sector companies to enter the mutual fund industry. This brought competition and innovation, with asset management companies (AMCs) like ICICI Prudential, HDFC Mutual Fund, and Birla Sun Life (now Aditya Birla Sun Life Mutual Fund) launching their funds. These private-sector mutual funds introduced a range of products tailored to different investor needs, including diversified equity funds, debt funds, and hybrid funds. They also catered to retail investors, making mutual funds an integral part of the financial ecosystem in India.
Fourth Phase: Growth and Competition
In this era, India entered a phase of rapid growth in the mutual fund industry, driven by increasing competition. Investors gained access to a wide range of products, including sectoral funds, international funds, and tax-saving funds. One significant development during this period was the introduction of innovative schemes designed to meet individual financial goals, such as children’s education and long-term wealth creation. This provided investors with greater flexibility in terms of risk appetite, investment horizon, and economic goals, allowing them to tailor their investments more effectively to their personal needs.
Additionally, technological innovation played a pivotal role in transforming mutual fund investments as people began managing their portfolios digitally. These platforms streamlined the investment process, offering tools for comparison, tracking, and purchasing funds, thus removing traditional barriers. This made mutual funds more accessible to first-time investors, further driving their popularity and adoption across the country.
Why Investment in Mutual Funds is Important?
Investing in mutual funds offers several advantages, including diversification, tax savings, and long-term wealth creation, making them an essential component of financial planning for retail investors. Below are the benefits showcasing the importance of mutual funds.
Diversification and Professional Management of Portfolios
Mutual funds invest in a variety of securities like stocks, bonds, and others, which helps reduce the overall risk of the portfolio. They are managed by professional fund managers who are skilled in stock market analysis, ensuring that investment decisions are made strategically. This removes the hassle for individual investors and provides a more efficient approach to managing investments.
Tax benefits and long-term wealth creation
Some mutual funds, like Equity Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act. These funds also provide the advantage of compounded returns over time, making them an excellent option for long-term wealth creation. This combination of tax savings and growth potential makes mutual funds ideal for achieving long-term financial goals.
Risk mitigation compared to direct equity investment
Unlike direct investments in equities, mutual funds invest in a wide variety of asset classes, which helps reduce the impact of market volatility on the portfolio. This risk mitigation feature makes mutual funds a more balanced approach to gaining equity market exposure, especially for less experienced investors. It allows investors to benefit from the potential growth of equities while minimizing the risks through diversification.
Data on Mutual Funds in India
Invested Amounts and Growth Over Time
The growth of mutual fund investments in India has been remarkable, particularly in the past two decades. Starting from the early days when the Unit Trust of India (UTI) was the only player, the industry has expanded significantly with the entry of public and private sector mutual funds.
The AUM growth has been exponential, with the industry expanding from ₹0.7 trillion in 2000 to ₹40 trillion in 2023. This reflects the increasing participation of retail investors, the introduction of innovative mutual fund products, and the popularity of SIPs.Here is the line chart showing the growth of assets under management
Image Caption: Growth of Assets Under Management (AUM) in India from 2000 to 2023, showing a sharp rise from ₹0.7 trillion to ₹40 trillion
Alt Text: A line chart displaying the growth of Assets Under Management (AUM) in India between 2000 and 2023,
Breakdown Of Investments
In 2023, mutual fund investments reflect a diversified portfolio catering to various risk appetites. Equity funds hold a significant percentage of the portfolio, being a top choice due to their growth potential in the current market landscape. Debt funds, on the other hand, are favored by conservative investors who prioritize stability and regular income as they invest in government securities, bonds, and other fixed-income assets. Finally, hybrid funds, which combine both equity and debt, offer a balanced approach to risk and return, making them suitable for investors seeking moderate risk. Here is a pie chart showing the breakdown of mutual funds in 2023
Image caption: Breakdown of mutual fund investments in India for 2023, showing the distribution across equity, debt, and hybrid funds.
Alt text: A pie chart showing the breakdown of mutual fund investments in 2023
Trends in Investor Participation
Over the years, the inflows in the SIP have contributed significantly to the mutual fund industry’s growth and have helped build trust among retail investors, making mutual funds a go-to investment option for systematic wealth creation. Here is a line chart showing the consistent growth of Systematic Investment Plan (SIP) inflows from 2015 to 2023.
Image Caption: Growth of SIP inflows in India from 2015 to 2023, showing a steady rise in retail investor participation.
Alt Text: Line chart showing SIP inflows in India from 2015 to 2023, increasing from ₹3,200 crore to ₹15,000 crore.
Future of Mutual Funds In India
Emerging trends like ESG-focused funds, passive investing, and international diversification drive the future of mutual funds in India. Fintech platforms, robo-advisory services, and increased digital adoption are making mutual funds more accessible, particularly for retail investors. As these technologies evolve, investors can expect personalized, low-cost investment solutions. Mutual funds will remain a cornerstone for wealth creation by offering a wide range of products, from low-risk debt to high-growth equity funds. With growing awareness of systematic investing and long-term wealth building, mutual funds are poised for continued growth in India’s financial landscape.
Bottom Line
Mutual funds in India have transformed the investment landscape, offering benefits like diversification, professional management, and tax savings. Starting with UTI in 1963, the industry has seen exponential growth, with assets under management (AUM) reaching ₹40 trillion in 2023. Key phases include UTI’s dominance, the entry of public and private sector funds, and innovations like Systematic Investment Plans (SIPs). Emerging trends such as ESG-focused funds, fintech platforms, and robo-advisory services are shaping the future, making mutual funds a cornerstone of wealth creation for Indian investors, promoting systematic investing and long-term financial growth.
FAQ’s
What is the history of mutual funds in India?
In 1963, the mutual fund industry in India began with the establishment of the Unit Trust of India (UTI) through an Act of Parliament. UTI operated under the guidance of the Reserve Bank of India (RBI), marking the start of mutual fund investments in the country.
What is the progress of mutual funds in India?
The Assets Under Management (AUM) of the Indian mutual fund industry has grown more than sixfold in the past decade, rising from ₹9.75 trillion on June 30, 2014, to ₹61.16 trillion by June 30, 2024.
mmmmmmmmmmmmmmmmmmmWho invented the mutual fund concept?
A Dutch merchant, Adriaan Van Ketwich, pioneered the concept of mutual funds by pooling money from several people and investing it in bonds, thereby reducing the risk through diversification.