Mutual Funds in India

The Mutual Fund industry started with the setting up of Unit Trust of India. The money market mutual fund segment has a total corpus of $1.48 trillion in the USA against a corpus of $100 million in India. The entry of private sector and foreign institutions in 1993 provided a boost to the Indian mutual fund industry in the form of different schemes launched. The Government of India took the initiative of developing mutual fund industry by offering various tax soaps in the budget and enabling it to play an important role in mobilization of savings and in the development of the financial market.

Till 1960s, the Indian mutual fund industry was not in existence. In 1963, the Government of India took the initiative by passing the UTI Act, under which the Unit Trust of India was set-up as a statutory body. The designated role of UTI was to act as a mutual fund. This was expanded in 1985 to make UTI a financial institution as well. UTI’s first scheme called the US-64 which was an open-end scheme was launched in 1964. It subsequently launched a number of schemes to suit the differing needs of the investors. Till 1987, UTI was the only mutual fund in the market since no one else was legally allowed to set-up mutual funds. In 1987, the public sector institutions like banks, financial institutions and insurance companies started establishing mutual funds, following the government’s decision to allow them to do so. State Bank of India became the second one to launch a mutual fund when it launched the SBI mutual fund in November, 1987. It was followed by Canara Bank Mutual Fund, LlC Mutual Fund, etc. In this regulated area, UTI was acting more as a vehicle for the implementation of the economic policies and the development activities of the Government than as an investment vehicle for the investors.

Finally in 1992, the Government allowed private sector players to set up mutual funds. Subsequent to this, a number of private sector mutual funds came up. As the number of mutual funds increased giving a choice to the investors, the competition in the industry has also increased, thus jolting the hitherto complacent public sector mutual funds into action. As a result, the investors not only had a wider choice regarding the kind of schemes and the sponsor of the mutual fund they started getting better service even from the old players. These private sector funds provided an added advantage to the investor. These were generally set-up in partnership with foreign mutual funds, with the latter providing the technology and the experience in managing funds. The investors could derive the consequent benefits by investing in these funds.

In India, both close-ended and open-ended investment companies are called mutual funds. Except the Unit Trust of India all mutual funds in India are organized and set-up under the Indian Trust Act as Trusts. Their role is to accept savings from the investors and invest the same as per the objectives incorporated in the next trust deed to manage diversified portfolio for the investors.

Role of Mutual Funds in Indian Financial Markets

Mutual funds play a significant role in the development of the financial market and this has been proved in the developed countries like United States, United Kingdom and Japan. India is at its first stage of a revolution that has already peaked in United States. In United States, the asset base of mutual funds is much higher than its bank deposits. In India, mutual funds assets are not even 10% of the bank deposits, but this trend is only at the beginning.

The mutual funds in India have emerged as strong financial intermediaries and are playing a very important role in bringing stability to the financial system and efficiency to resource allocation. Mutual funds help corporates in raising funds for their financial needs and provide an avenue of investment to investors by parking their savings. This leads to the overall growth of the economy. The major chunk of the household savings in India, which earlier went to bank deposit are now being taken by mutual funds. The active involvement of mutual funds in promoting economic development can be seen not only in terms of their participation in the savings market but also in their dominant presence in the money and the capital market.

A developed financial market is critical to build overall economic development and mutual funds play an active role in promoting an active healthy market. Mutual funds increase liquidity in the money market. The asset holding pattern of mutual fund in India indicates the dominant role of the mutual funds in the money and capital markets. The private corporate sector in India is a deficit sector and the gap between demand and supply of financial resources is met by funds raised through loans, advances and issuance of securities. However, the buoyancy in the capital market has increased the reliance of the corporate sector has more than doubled. The changing pattern of corporate financing indicates that the banking sector is loosing its prominence vis-a-vis the other financial sector. Direct financing by mutual funds to the corporate sector has substantially increased after SEBI guidelines allowed’ the corporate sector to reserve 20% of the public issues for Indian mutual funds.

Mutual funds have also widened the private placement market for corporate securities. Mutual funds have enabled the corporate sector to raise capital at reduced costs and have opened an avenue for alternate source of capital. Mutual funds in India have merged as a critical institutional linkage among various financial segments like savings, capital market and the corporate sector. As various tax incentives and benefits on mutual fund investment are offered by the Government, their role in the mobilization of savings and the development of the economy will assume more significance. They provide much needed impetus to the money market and the stock markets, in addition to direct and indirect support to the corporate sector.” Above all mutual funds have given a new direction to the flow of personal savings and semi-urban areas to reap benefits of stock market investments. Indian mutual funds are thus playing a very crucial development role in allocating resources in the emerging market economy.

Credit: Investment Management-KU

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