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CHAPTER
GROWTH OF MUTUAL FUNDS IN INDIA
AN OVERVIEW OF THE INDIAN FINANClAL MARKET
In every country its Financial system greatly influences its economy The close
relationship between financial structure and economic development is reflected in the
prevailing institutional arrangement, delivery system and other aspects of sustained
developments.
Guerley and Shaw(1955) lew the role of financ~al nstitutionsas one which
helps in reallsing the opportunities for savings and real investment In an economy.
A certain level of financial development also paves the way for the moblllsat~on f
funds which is a clear shifl from self-financing to direct financing, and then to indirect
financing. indirect financing includes financial intermediaries like banks, insurance
and other financial companies which act as a link between money savers and
borrowers of funds Financial intermediaries also play a very important role in
eliminating market imperfections which arise out of nondissemination of information
about borrowers. According to Kaizuka(1987) distortions in the market can be
eliminated or mitigated by several institutional dev~ces nd it is in this respect that
financial arrangements such s an issuing market for securities and financial
intermediaries play their roles. According to Kauh an (1986) financial institutions
are expected to embody the essence of integrity and their entrepreneurial drive is well
Gucrley and Shaw, 'Financial aspecls of Development', Renew,v0145, 1955, pp 515-539
p h k a 'A comparative study on Financial Development' in ym Sato (ed)., Academic w Tokyo. 1987
- load Small Company Growth Fund . hldl&2URewn.1986
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balanced by a strong s ns of fiduciary responsibility and that is why financial
regulations have always been ap rt of economic development.
Mutual funds are dynamic financial institutions (FIs) which play a crucial role
in an economy by mobilising savings and investing them inth stock-market, thus
establishing a direct link between savings and the capital market. Therefore,the
activities of mutual funds have both short-and long-term impact on the savings
pattern, growth of capital markets and the economy. Mutual funds, thus, assist the
process of financial deepening andinter-mediation. They mobilise funds from the
savings market to deploy the same in the Capital Market. Mutual funds actas
complementary to banking and at the same time they also compete with banks and
other financial institutions. In thls process. the stock market activities are also
significantly activated by mutual funds. There is hardly any segment of the financial
market which is not (directly or indirectly) influenced by the existence and operation
of mutual funds. However, the scope and efficiency of mutual funds are influenced
by overall economic fundamentals: the inter-relationship between the financial and
real sector, th nature of development of the savings and capital markets, market
structure, institutional arrangements and overall financial policy regime. Reforms in
the financial sector have also enhanced the scope of India s accessto international
capital markets, and the flow of international savings into Indiahas thus cleared the
path for integrating the Indian market with global capital markets. Globalisationhas
increased the scope of competition, technological change and investor-fnendly
research, which in course of time should increasethe efficiency of lndian institutions,
reduce th cost of operations and encourage better resource allocation.
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INSTITUTIONAL ARRANGEMENTS
The Indian financial sector has two broad segments-organised and
unorgarused. The organised segment includes commercial banks, development
finance institutions, insurance companies, and other non-bank financial institutions,
including mutual funds, unit trusts, etc. n important characteristic of the lndian
financial system is the predominant presence of public sector institutions and a very
high degree of public ownership and control, in keeping with the policy of planned
development in force since 1951. The publ~c ector financial institutions in the
organised sector can e grouped into the following broad categories. Figure3.1)
COMMERCLAL BANKS
With a wide network of branches, they primarily collect deposits and lend to
industry on the cash-credit basis, besides priority sector lending. They are subject to
several restrictive norms.
TERM LENDING DEVELOPMENT INSTITUTIONS
These are Industrial Development Bank of lndia IDBI), Industrial Finance
Corporation of India and Industrial credit and Investment corporation of lndia
ICICI). They cater to the needs of long-term finance for the corporate sector.
INSURANCE INSTITUTIONS
These are the government-owned Life Insurance Corporation of India LIC),
and General Insurance Corporation GIC) and ~ t subsidiaries. They provide life and
general insurance, mobilise funds and invest in capital markets. They arc important
institution l investors in India.
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N D M U T U L s
There rc35 mutual fund families including UTI which is the oldest) in India.
The thr categories of mutual h d s are public sector mutual funds, dom es t~c rivate
sector mutual funds and foreign mutual funds. They have emergedas dynamic
financial intermediaries and are very important inshtutional investors in India. In the
savings market, mutual funds compete with banks and in the capital market they are
the most influential playen to influence market movements.
Figure 3 1
Structure of the Indian FinancialMarket
MINISTRY OF FINANCE
Institutions Exchange Board
Financial
Institutions
SIDCs
Investment
Institutions
Sectoral
TFCINABARD
Stock ExchangeMerchant BankersUnderwriters
tock BrokenRetail Investors
Flls
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GNP SAVINGS N D THE C PIT L MARKET IN INDlA
Financial institutions re an integral part of the economic smcture in any
counhy. While they assist financial deepening theyare also influenced by the growth
of the economy, such as the growth of gross domestic product (GDP), per capita
income and savings. Despite relying on centralised economic planning, Indiahas
achieved significant success in economic powth and its GDP (at factor cost) at 1980-
81 prices went up from Rs 42,871 crore in 1950-51 to Rs 2,74,209 crore in 1995-96 .
The growth rate of gross national product (GNP), whichwas 3.7 per cent during the
First Plan (1951-56) crossed the 5 per cent mark during the Fifth Plan (1974-79). The
GNP was 5.5 per cent during the Sixth Plan (1980-85), 58 per cent dunng the
Seventh Plan (1985-90), and stood at 7.1 per cent in 1995-96. There was a sharp
upturn in GDP growth in 1998-99, which reversedthe deceleration in growth seen in
1997-98. The GDP (at factor cost) growth accelerated to 68 per cent in 1998-99 from
5 per cent in 1997-98.
Gross domestic savings declined sharply in 1998-99 to22.3 per cent of GDP.
The 2.4 per cent points of GDP decline in savings rate resulted from 1.4 per cent point
decline in public saving and a 1 per cent point decline in household savings in
physical form (i.e. direct investment). The corporate savings rate also declined to 3.8
per cent of GDP in 1998-99 from 4.3 per cent in 1997-98. Though household financial
saving increased as a proportion of GDP, the overall private savings rate declined by
1 per cent of GDP. The decline in saving rate of the government and households is a
counterpartof the higher consumption growth during 1998-99.
Data Regrrding GDP. GNP. Pwupita income, u s , hns b a n t k from Economic survey199''-95,1995- u 1996-97.
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In spite of a high growth in population, per &ta Nu N a t l o ~ l roduct
NNP) went up from Rs 1,126.9 in 1950-51 to overRs 2,573.2 in 1995- . The
growth in GDP. NP and per capita Income havehad a positive lmpct on financial
act~vities, articularly on the savings market The changlng nature of flow of funds
and sauctwal changes In the savings and capitalmarkets In lnd~aS to e m l n e d
THE S VINGS MARKET
Funds flow analysis indlcate a changing trend in the relative importance of
financial institutions, and households' preference of financialinstitutions and
instruments. The change becomes more clear ~f one examines the growth and
development of thc savings market over a penod of t ~ m e
lndia is one of the few countries today to maintain a steady growth rate in
domestic savlngs. Savings being the prime mover of economic development, Indian
plannen have always focused on this aspect of economlc development. It 1s to be
noted that gross domestic savings (GDS) in lndia Increased from Rs 975 crore In
1950-5 to Rs 1,29,999 crore In 1990-91, and to the all -t~m e igh of Rs 2,8l,014 crore
in 1996-97'
GDS as percentage of GDP In IndiaIS one of the h~ghestn the world, andhas
remained above 20 per cent since 1976-77 (except for the yean 1981-82 to 1986-87)
GDS as percentage of GDP went up from 10.4 per cent In 1950-51 to 24.3 per cent In
1990-91, and 25.6 per cent in 1995-96. Though the overallrate of growth of savlngs
s percentage of GDP has fluctuated, it h s always remained above 2 per cent since
1988-89.
World Emerging Band Mvlret I d u June 995
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he healthy rowth of savings In India has been boosted bythe howhold
sector which h s contributed a substantially high percentage to total domest~c avingshe ontribution of this sector went up from 73.7 per cent In 1950-51 to8 3 per cent
In 1990-91 but declined to 76.4 per cent in 1995-96.
Institutional development in the financial market lnflucnced the savlngs
patterns, particularly In the household sector. Financkal ~ntermed~ancsssist thetransfer of savings to the real sector of the economy through the format~on f financial
as-. The change indicates that household savings in gross financ~al ssets went up
94. though they declined to 59.56per cent in 1994-95 This indicates growing
financial intermediation In the Indian economy.
With the growth of capital markets, bank deposits have lost their charm t can
be seen from the data In Table 3.1that the share of bank deposits in gross household
financial assets declined from 45 8 per cent in 1980-81 to 33.2 per cent in 1993-94.
and then rose to 40.2 per cent in 1994-95. After 1995 the bank deposits In gross
household financial (asset) again declined to 34.4 per cent In t k year 1996-97 W ~th
the growth of capital markets and the emergence of alternat~ve avlng instruments,
Investors are tending to move towards more liquid, shon-term Instruments like units,
shares, debentures, etc. The percentage share of corporate equity and debentures.
together with UTI units Increased from 3.7 per cent in 1980-81 to 17.2 per cent ~n
1992-93, while the share of less llqu~d nvestment like LIC, PF and pension increased
marginally fiom 25.1 per cent to 27.2 per cent during thes me of penod However,
depressed conditions in the stock marketaffected mutual funds rnobilisation along
with the other c pit l market instruments, and in 1996-97, the share ofthe former w s
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p r cent nd the latter 3.9 per ca t , ide ting a change in favour of less risky less
l~quid nd more ssured returns.
Table 3.1
Instrument-wise D itrib utio n of Hou rb ol d Aaaetc
Non-Bank 37800 128600 603500 1165400 1174300 1707900 2573300deposits 3 10) 2 20) 7 50 10601 840) 1370) 1680)
L~fe nsuramfunds
Prov~denlndPenslonfunds
hams and 41200 497200 821200 1006700 846100 588000 600300Debentures 84011 10201/ 921/ 6 ro d 4 7001 3 9 0 i
I I 1
915.007 €0)
2122 0011750)
Source: Rcocrvc Bank of Gdia Curracy and ~ i o w k 9 -97
Clams onGovernment
Un~tsf uTI
Trade Debts
THCAPITAL MARKET
5599.009.50)
11155 0011890)
3949004 90)
An analysis of shvctwal changes in the savings market indicates the growlng
71200590)
Note P Rovis~onalFigures in brackets d c a t e Dcrccntanc to uos s financialassets
31000 30)
373003 10)
importance of capital market instruments like shares debenturesand w t s in
7114.008.80)
14817.00H840)
6784006 20)
79420013 50)
household financial assets. Growth and stability in the capital marketare vital for
343800580)
4 5 3 0 04 8)
efficient m u r c e allocation i.e. the transfer of resources from the savings market to
9548 00870)
18248 0011670)
13222009 50)
the real sector of th economy
5612007 00)
-1398001 70)
11344008 10)
206190011480)
10873008 70)
11987007 80)
4705004 3)
-1190001 1)
13481 0010 80)
25438 0012040)
12623 008 30)
274421790)
3908002 80)
-1600001 1)
26200020)
3W00020)
30200020)
2667001 70)
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he Securitiesand Exchange Board of lndia (SEBI) has brought out sever l
regulations to improve the efficiency and quality of the capital market. The SEBI
~ c tromulgated in January 1992 encompasses the entire gamut of secunties Industry
In India. The other regulationsare: SEBl (Stock Broken and Sub-Broken) Rules and
Regulations, 1992; SEBl (Merchant Banken) Rules and Regulanons, 1993; SEBl
(Registran to an Issue and Share Transfer Agents) Rules and Regulations, 1993;
SEBl (Insider Trading) Regulations, 1993; SEBI (Mutual Funds) Regulations, 1993;
SEBl (Prohibitron of Fraudulent and Unfair Trade Practices Relating to Securities
Market) Regulations, 1995. The Malegam Committee report on disclosure norms
alms at improving transparency, quality and competition in the capital market.
Several steps have been initiated to improve the activities in the secondary markets.The removal of badla and introduct~on f revised carry fonvard, monitonng of price
movement, introduction of captal adequacy norms for brokers, changes in l~stlng
rules, introduction of electronic trading, establishment of National Stock Exchange
(NSE)and Over the Counter Exchange of lndia (OTCEI) etc., are all steps that have
altered the market scenario in Ind~a. y end 1995, lndia was first in the world in
terms of listed compan~es 7,985). However in terms of market capitalisation lnd~a
ranked 21 (with a market capital of US 1,27.199 mill~on) nd its position In total
value tradedwas 31 (with US 13,738).
A number of steps were taken to liberalise and upgrade the capital market
dwing 1998-2000. The securities laws (Amendment) ACT,1999 passed by the
parliament in December 1999 expands the definit~on of secunties to include
derivatives and units of collective investment schemes This will allow the
Bomtmy Stock Exchange 1995 96
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lntroducti~lof index features and other derivatives and strengthen the legal
framework for regulating collective investmentschemes
The securities laws (Second Amendment) Act, 1999 amends the SCRA, 1956,
(he SEBl Act 992 and the Depositories Act 1996 to empower the xcunties
Appellate Tribunal to dispose of Appeals under these Acts.
The requirement of actual payment of d~videndsbefore an [PO) n~tial
Public offers was replaced by an ability to pay criterion The Par Value concept
was abandoned so that companies c n now issue shares of any value. Companies
wth dcmated shares c n alter the par value indicated in the Memorandum and
Articles of Association. Existing companies with shares of Rs. 10 or Rs1 can
avail of this facility by consolidat~ngor splitting these shares. SEBl had ~ssued
gu~del~nesor the credit rating agencies In t h ~ somect~on
In addition to these measures due to external sector reforms undertaken in
1999-2000, the Indian capital market has witnessed an unprecedented upsurge To
mention a few, the new Foreign Exchange Management Act, 1999 in place of FERA
had all the provisions m conform~tywith a liberalised market for foreign exchange.
Prevent~on of Money laundering bill has been introduced in parliament.
Comprehens~ve utomatic approval system for FDI, based on a negative 11st and
transparent sector limits introduced. The Foreign equity limit forFDI through
automatic route fordrugs and pharmaceuticals raised to74 per cent from the present
per cent.'
SEBL - 2oommic Timcr bi l y ublished by E c o ~ m i c i ma Reourch Buruu
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An automatic route w s opened for th issue of ADR's ,GDR's ,by Indian
companies under liberalised guidelines. Further the external Commercial borrowings
(ECB) guidelines have been ibedised.
India, thus, ha emerged as one of the mpohant stock markets of the world.
The opening up of the economy and the introduction of reformsas r t of th
structural adjustment programme have made the Indian capital market one of the most
attractive emerging markets in the world, as evident from the flow of funds and entry
of foreign brokers and financialinstitutions Into India.
THE PRIMARY MARKET NEW ISSUES
Changes in economic policy involving opentng up of the Ind~an conomy,
freedom to corporate sector to approach capital markets tofix prices and premiums
and public sector disinvestment programmes have glvena much-needed boost to the
primary market. The total amount of cap~tal ssues in the market went up fromRs
?1,673.6 crore in 1992-93 toRs 30,823.9 crore in 1994-95. The same, however,
declined to Rs 22,918.5 crore In 1995-96. Capltal issue (amount mobillsed as a
percentage of GDS lso decreased marginally, from 13.9 per cent in 1992-93 to 13
per cent in 1994-95, but drastically to 8.16 per cent In 1995-96.'
There has been a steep fall in fresh public issues in the last two years
(199698). While the fall is more prominent in the equity floatatlons, even debenture
Issues have dropped.
The Indian stock market witnessed considerable changes in thelast 5 y m .
The number of listed Companieshas been rising continuously. Despite a fall in BSE
Bomhy Stock Elccbngc. Stodr vksts w h y 1997
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sensex dunng 1997as compared to 1994 the total volumes traded in during the same
nearly doubled. However,the amount r ised through pnmary capital issues
rnntinuesto fall due to negative investor sentiment.
THE SECOND RY M RKET
The growth of the primary market in the post-reform periodh s also boosted
the activities of the secondary market in terms of growth of stock exchange, listed
capital, market capitalisation, etc.
Stock market indices indicate the changing ~nvestorss ntim nt and direction
of economy. In the post-reform period, particularly 1992, the market wtnesseda
bullish phase and the 30-share sensex reached a peak of 4,467 on April 1992
tlowever the movement ofind~ceswas moderated subsequently in 1993-94. One
of the sign~ficanthappenings during this period was also a moderation in PIE ratios.
cons~dered o be the most important determ~nantof Investment dectsion. The PI
ratio which reached its peak in 1994 gradually came down and m December 1996 it
touched ts lowest when sensexP I w s 16.57 and Natex P E 12.20. The lower PIE
ratlo was an attractionto foreign investors (Table3.2).
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Tabk 3.2
Stock Market ladiaton
lM1ator8
The stock market indices clearly exhibits the changing investor behav~ours nd
t1992
Index
U x N U
I Aprll
I 1996
the role ofcapital market in guiding the economy. TheBSE sensex which was ruling
December 3949 78 1 1876 13 1 4645 38 58 1 423 4,oO 13 4 5
April 598 66 1649 6 19 57
around 700 points In the year 1990 surged ahead and reached 3500 mark In the year
PIE R ~ I O
382475 2 0 6 3 6 4 8 6 8
20 14 371 6 36 868
1998. Further it went upto 6151 points during the end ofYear 2000 due to the
nmx
1 8 5 5 8 1 4 6 4 3
unprecedented escalation in the prices of software and pharmaceuticalscnps At
N u -rmw cW yryRs Cr)
Demmbr/ 2918681 1290211 122
present its ruling around 5141 markas of march 2000 The SE National Index
11781 3861477,425
reached as highas 3000 mark and now ruling around 2900 mark The NSE ~ndexhas
hide ESIIMI~or dl-lnd~aS a u c x Base 1978-79 W
ua (Bue 983-84 IM))Source Govmrnentof Ind~a. lnlstryofF~nance Econom~cSurvey, 1993-94. 994-95. 1995-
changed from 347.44 in 1990 to around1000 polnts in 19Q9
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BSE National Index (Natex) represents1 companies. tween 1990 and
1994, 11 mult~plied y over5 times. Since then, it has been on the downtrend In the
tint 9 months of 1998. BSE Natexhas fallen by 5.4 per cent.
BSE Sensex represents30 comp nies Recently the sensexw s revamped with
Increase in weightage of software and pharmaceuticals at the cost of cycl~cals.The
sensex recorded stupendous growth In 1991-92 (Harshad Mehta boom) and in 1994
on the back of FII buying
ROLE O F MUTLIAL FUNDS IN THE FLNANCIAI MARK ET
The ln d~an financ~al lnstltutlons have played a domlnant role In assets
format~on and ~n term ed~ at~on ,nd contnbuted substant~ally In m croeconomic
development of ow countr) In thls process, lnd~anmutual funds have emerged as
strong tinanc~al lntermedranes and areplaying a very tmportant role In bnnglng
stablllty to the financ~al ystem and effic~ency o resourceallocation Mutual funds
have opened new vlstas to investors and ~mparted much-needed l~ qulh ty o the
system n the process, they have challenged the h~therto omlnant role of commercral
banks In the Ananc~almarket and nat~onaleconomy An attempt S made In thls
chapter to examine the rnu lt~d ~m en s~ on alole of mutual funds In the financ~al ector
In lnd~a Further the study S focused towards the growth prospectsand the factors
that acts for and against the future of the Industry
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MUTUAL FUNDS A N D HOUSEHOLD SAVMGS
Mutual funds rc th fastest growng institutions in the household savings
sector. Growing complicationsand risks In the stock market. nsingtax rates and
~ncreasing inflat~on have pushed household towards mutual funds The present
share of mutual funds In household financial assetsIS over 17 per cent in the
USA, 10 per cent in Germany, 8 per cent in Japan,4 per cent Italy and about8
per cent in India. The share of mutual funds in personaL househoId savings is o m
~ndicator f the imponance of mutual funds n the savings market, but what is more
Important is the rate of growth of this share In 1980. 58 per cent of the personal
sector wealth In the USAwas held in financ~al ssets; by 1992 this had risen to63 per
cent. Meanwhile equity and bond mutual funds soared from less than 1 per cent of per
cent of personal Rnanc~al ssets in 1980 to nearly6 per cent in October 993 In
1992, the share of mutual funds infinancial assets in the USA was 54 per cent as
against 0.7 per cent in1980 The share of other u tm m ents, ltke commercial banks,
thrifts and insurance declined s~gnificantly.The stock markets in USA are In an
upbeat mood dunng this financial year 1999-2000 The share of mutual funds In
financial assets in the USA went upto 17 per cent by the end of the year1999
The fierce competihon between mutual funds and the banking tndustry tn the
USA has caused a severe fall In bank depos~ts.n fact mutual funds in the USA have
in many ways . . evolved into America s alternative banking system- freely moving
capital around in ways that bank(s) still hobbled by ant~quated egulatory structure(s)
cannot (Laderman and Simth 1993). A similar trend in the flow of funds from
Eanomic Timn. Spsjrl Repon. Munul Funds. ooba 9 1995StUiniul A b n n a of the United S t a a . 1995 [ 15 Edition] uwih TN)dcaum d Smith. Ths o w of Muaul Funds . Bwma . u u q lo 1993
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banking to mutual fun s has m observed in Europe In Italy where the share of
mutual funds In household savings accounted for only 3 per cent in 1993.
INDIAN SCENARIO
In Ind~ a, here has been a steady Increase In the share of mutual funds In
household savlngs (tinanclal assets) slnce 1988-89, e after the e n y of publ~c ector
mutual funds Gross savlngs of the household sector In financ~al ssets Increased from
Rs 12.1 18 crore In 1980-81 to Rs 1.35,348 crore In 1994-95 The bank~ng ectorIS the
most dominant In the savlngs market but ~ t sole In the savlngs market has decl~ned
relat~vely The most s~gnlficantgrowth durlng 1980-81 to 1992-93 was noted In
respect of unlts of Unlt Trust of Indla(UT1) whlch Increased from 0 3 per cent of the
total household savlngs In 1980-81 to7 0 per cent In 1992-93 (but decl~ned o2 8 per
cent In 1994-95) The percentage share ofeqruty shares and debentures together
Increased from 3 4 per cent to 10 2 per cent However, the percentage share of bank
d e p s ~ t s ecl~ned rom 458 per cent In 1980-81 to 33 2 per cent In 1993-94, to
remster a further Increase of 40 2 per cent In 1994-95 The overall beansh trend In the
cap~talmarket and the slugg~sh performance of mutual funds conmbuted to the
latter s decllne In the new Issues market In 1994-95
The boom period in 1991-92 saw the mutual funds mobllisea record
Rs 4,000 crores. Movlng In tandem withth setback in the stock market In 1992. the
gross mobilisation of the mutual funds fell to Rs. 9.500 c rom . The penodalso
witnessad the entry of Foreign lnstitut~onalInvestors Into the arena of portfolio
investments.
cumties nd Exchnge d f India nnul cpon 19 34 93
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As it is the inherent nature of the mutual fun s industry. m performance is
directly related to the Capital M e t and to overall economic progress. The Indian
economy showed mixed results during the past ten yean I t reached the highest ever
real p w t h rate o f over 10 per cent in 1988-89 But the s~tuation apidly changed
during 1990 and culminated In the lowest n l GDP growth and was beset w t h a
foreign exchange crisis in 1991
The liberalisat~onprocess then began largely as a result of economic
compulsions. The country has averaged a steady growth of around 6 percentage In
real GDP in the past 6 years The overall household savings in the economy has
Increased from mere7
4 per cent In 1950-5 to 18 5 dunny 1998-99
Dunng the penod 1992-95 the financ~almarket was agun upbeat wh~ch ead
to a tremendous growth In pnmary market Annual moblllsat~onrom equ~ty ssues
crossed s 36 000 crore In 1994-95 as against s 18 100 crore ralsed In 1992-93 As
expectations from equltles roared mutual funds mob~llsat~o nemalned high dunng
the penod 1993-95 As the number of equtty-based mutual funds grew these were
aggressively sold wthout much attenhon bang pa ~do educat~nghe retall Investors
about the volahllty of thls category In 1998 the resource mobll~sat~onlwssed a
renewed growth Currently there are over 4 mutual funds organlsatlons In lnd~a
manaeng over s 1 00 000 crores through 450 odd schemes
he active role played by the mutual fun s in promoting economic
development c n be seen not only in tenns o f their participation in the savings market
but also In their dominant presence in the money and capital market. A developed
financial market is critical to overall economic development and mutualfun s play a
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pivotal role in promoting a healthy capitalmarket. Mutual fun s ncrease liquidity in
the money market.
STRUC TURE OF INDI N MUTU L FUNDS
In developed counhies like theU and the USA the mutual fund industry is
highly regulated with a view to impart operational transparency and protect investors
~nterests.Since there is a clear distinction between open-ended xhemes(mutual
funds) and close-ended schemes, usually two different types of structural and
management approaches are followed. Open-ended Funds(unit trusts), in theUK
follow the trust approach while close-ended schemes (InvestmentTrust) follow the
corporate approach . The management and operations of such funds are therefore
guided by separate regulatory mechanisms, and rules are laid down by the separate
regulatory mechanisms, and rules are laid down by the separate controlling
authorities. However, these distinctions are not followed in India and both the
approaches, i.e. , trust and corporate,have been integrated by the Indian regulatory
authority, SEBL
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Structure of Indian Mutual Funds
Establishes M asTrua RegisterM with
Board of - Hold Un~tholdersund inT w t a M Enlure Complimce to
SEBI Enter into Agreement
Appointedby LBaord ofTrustee Hold UnitholdersFund in
MF Ensure Compliance toSEBI Enter into AgT~mCnt
Appointedby HWith SEBITrustee
Provides ecessaryCustodian Service
Appointed yTrustee
Pmvide Banking Scrv~ce
AppointedbyTrustee
Agents Serv~ecnd a n as aTransfer Agents
SEBI ND MUTU L FUNDS
The formation and operations of mutual funds in India is solely guided by the
Securities and Exchange Board of India Regulations Mutual Funds)
Figure 3.3 gives an idea of the structure of Indian mutual funds.A mutual fund
comprises four separate entities, namely, Sponsor, Mutual Fund Trusts, AMC and
Custodian. They are of course assisted by other independent adm~nistrative ntities
like banks registrars and transfer agenu.
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Regulations, 1993, which came into force on anuary 20, 1993. The
regulations have since been replaced by the Securities and Exchange Board of India
(Mutual Funds) Regulations.1996.through a notification on9 December 1996.
As per SEBI Regulations,1996,a mutual fund is to e formed by the sponsor
and registered with SEBI. A mutual fund shall be constitutedIn the form of a trust
and instrument of trust shall e in the form of a deed, duly registered under the
provisions of the Indian Registrations Act, 1908 (16 of 1908), executed by the
sponsor in favour of trustees named in such an instrument.
The mutual fund is managed by the board of trustees and the sponsor executes
the trust deeds in favour of the trustees. The mutual fund raises money through sale of
units under one or more schemes for investing in securities in accordance with SEBI
guidelines. It is the job of the mutual fund trustees, to see that the schemes floated and
managed by the AMC appointed by the trustees, are in accordance with the trust
deeds and SEBI guidelines. It is also the responsibility of the trustee to control the
capital property of mutual funds schemes. The trustees have the right to obtain
relevant information fromthe AMC, as well s a quarterly report on its activities
They can also dismiss the AMC under specific conditionas per SEBl regulations. At
least half the hustees should e Independent persons. The AMC or its employees
cannot actas a trustee. No person who is appointedas a trustee of a mutual funds can
e appointed as a trustee of any other mutual fund unless he isan independent trustee
and prior permission is obtained from the mutual fund in which he is trustee. The
trustees are required to submit half-yearly reports to SEBI on the activities of the
mutual fund. The trustees appoint a custodian and supelvise their activities. The
trusteescan be removed only with prior approval of SEBI.
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The regulationsdeal with various issues relating to the launchng. advertising
and listing of mutual fund schemes. All the schemes tobe launched by an MC need
to be approved by the trustees and copies of offer documents of such schemesre to
be filed wit SEBI. The offer documents shall contaln dequ te disclosures to enable
investors to make informed decisions. Advertisements In respect of schemes should
be in conformity wth the prescribed advert~sement ode of SEBI.
The listing of close-ended schemes IS mandatory and every close-ended
scheme shouldbe listed in a recognised stock exchange wthinSIX months from the
closure of subscription.However, I~stings not mandatory.
If the scheme provides for per~od~cepurchase facilities to all unit holders, or
If the scheme provides for monthly income or caters to special classes of
persons, or MIP schemes of UTI)
If the scheme discloses details of repurchase in offer document, or
If the scheme opens for repurchase wthin SIX months of closure of
subscription
Units of a close-ended schemecan be repurchased or reissued by an AMC.
Units of a close-ended scheme can alsobe converted into an open-ended scheme.
Uruts of a close-ended scheme maybe rolled over by passing a resolution by majority
shareholders,
No scheme otherthan unit-linked scheme canbe opened for subscription for
more than 45 days The MC must specify in the offer document about the minimum
subscription which it intends to retain. In case of over-subscription, all applicants
applying for up to 5 000 units must be given full allotment subject to
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oversubscription. The AMC must refund the application money ~f minimum
subscription is not rseived and also the excess oversubscription withln six weeks of
closure of subscription.
Guaranteed returns c n be provided in a scheme if such a return is fully
guaranteed by the MC or sponsor. In such cares, there should be a statement
indicating name of the person and manner in whichthe guarantee to be made must bemade in the offer document.
NEW RE CU WT IO NS FOR THE DEVELOPMENT OF MUTU L FUNDSINDUSTRY PROPOSED
The equity investment In a company by a mutual fund shouldbe limited to 10
per cent of the net asset value (NAV). The committee appointed by SEBl to advlse the
regulatory body on matters relating to the development and regulation of mutual funds
In the country, recently made it s recommendations. However, the exception to the
limit is that this is not applicable in case of the scheme with an 0bjectlve of
investment In index funds and inc se of sector or industry specific scheme n such
cases, the limit shallbe 10 per cent or the weightage of the scrip in the indexisub
index of the sector whichever IS higher subject to adequate disclosures in the offer
documents.
As per the earlier regulation, no mutual fund under all its schemes could own
more than 10 per cent of any company s paid-up capital carrying voting rights. The
committee h s also made its recommendations for Investment in debt securities. As
per existing regulations. there are no restrictions on the investments in debt securities
~ . ~ D a t i m u k h ,dvisory Committee M Murd Funds m Resulations for IluDcvclopmenc of Mutud Fund lndurtry Ropoxd . November. 1999 Dh.n.com Money line
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of a single issuer. The committees recommended that the investment on debt
insbument issued by a single issuere
restricted to 15 p r ent of NAV of the scheme
and this limit may e extended to 5 per cent of the NAV of the scheme with the pnor
approval of the board of the asset management company AM C) and board of
trustees Again exceptions tothe proposed rule are government secunties and money
market instruments. The committee also recommended to restrict the ~nvestment n
unlisted shares to a maximum of 10 per cent of the NAV of the scheme inc se of
close ended scheme and In case of open-ended schemesthe list may e made more
stringent to 5 per cent of the NAV of the schemeas there is continuous purchases by
InvestorsIn such a scheme.
As for as debt instruments without rating, the committee recommended that
the investment n such a scheme should not exceed 15 per cent of NAV ofa scheme
and this limit may e extended to 5 per cent provided the AMC gets the prior
approval of the board of the AMC and board of trustees presently a mutual fund
can invest upto 5 per cent of the NAV of all of its schemes in the listed secunties of
group companies of the sponsor This provlslon is liable toe misused slnce it 1s
possible that the mutual fund can Invest the entire NAV of any one of the scheme in
the group companies and st111 e wth in the 25 per cent limit of all ~ t schemes
Therefore, the committee recommended that such h i t of5 per cent should e for
NAV of each scheme separately and not for all the schemes ofa mutual fund put
together.
About change in controVfundamental attributes inc se of an open ended
schemes: under the existing regulations inc se of change in control and change in
fundamental attributes, 314th of the unitholden approval is required Mutualfunds
have rtpnsen tcd th t this clause maybe relaxed in the case of open ended schemesas
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the unitholden have an exit ophon throughout the life ofthe scheme. If the investon
do not gree to the changes proposed by the mutual Fund they can exitat any time ath e prevailing NAV.
A pre-condition for such change may be that the unitholders shouldbe
Informed by way of individual communication and through advertisements in the
newspapers. The committee considered the proposal and found acceptable. Thecommittee further recommended that the mutual funds should disclose atthe ume of
declaring half-yearly and yearly results any undenwiting obl~gationsundertaken by
the schemes of the mutual funds with respect to issue of associate companies,
development, if any, subscription by the schemes in the ~ssues ead managed by
associate companies and subscription to any Issue of equity or debt on pnvate
placement basis where the sponsor or ~ts 'gssociate companies have acted as
arrangedmanager.
The Assoc~atton f mutual funds In lndta AMFI) has submtned a senes of
recommen uons to Secunt~es nd Exchange Board of ln d~aSEBI) for upgrading the
standards of Indtan mutual funds Industry to the tnternat~onalevels whlle entenng the
new m~llennrum
AMFl has approved vanous tnitiatives like semi-annual disclosure of
portfolio, recommendations regarding Non Performing Assets (NPA), formation of
audit committee. of trustees, setting up vduation committee by Asset Management
Companies (AMCs), Investor education, setting up of committees on best practices, to
AMFl uggats Swaping Change in the utual Funds Stududs for the New illennium- Dhnmm M m y Line, J M U ~W0
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formulate proposal for ~ n d i v i d detirement plan and review impact of c d tpolicy
measurn.
In the c se of disclosure, the AMFlh s suggested SEBI norms for mandatory
semi-annual disclosure to mutual funds. Currently the mutual fund regulation
provides for disclosure of full portfolio in the balance sheet and the a ~ u a lepon sent
to the unit holders once a year. Now in order to enhance the level of disclosure
standards and to bring it onp r w th international levels, AMFl has suggested that the
mutual funds should made disclosure of portfolio twice in a year. In order to promote
fairness in the treatment of non-performing assets relating to debt securities by all
mutual funds, the five member MFl ommittee headed by Nijamatullah also made
recommendations like identification of assets as NPA, provis~oningof income,
provisioning of asset value and disclosures by mutual funds. Besides these, the AMFI
board has suggested formation of audit committee by the board of trustees, formation
of valuation committee by the AMC trading securit~esby employees of AMC
Investor education and training of agents and intermediaries.
During 1995-96, SEBI had prepared and wdely c~rculated a paper titied
Mutual Funds2000 which identified ways to improve the working and regulation of
the mutual fund industry,so that mutual funds could provide a better performance and
service to all categories of investors and offer a range of innovative products in a
competitive manner to match investor needs and preferences across various investor
segments. Based on the comments received on therecommendations made in the
paper by market part~cipants and Investors and on discussions held with the
Association of Mutual Funds of India (AMFI), the SEBI (Mutual Funds) Regulations,
1993 were revisedand the new regulations notified in December 1996.
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he SEBl Mutual Funds) Regulations. 1996. The revised regulations
embodiedfar reaching changes in the regulation and functioning of mutualfunds.The
revised regulations provide for
Enhanced level of investor protection
Empowerment of investors
Stringent disclosure norms in the offer documents, so that investors are
better informed, better advised, better a w r e of nsks and rewards
Standard~sation f norms for valuat~on f assets, computation of Net Asset
Values NAVs) of schemes of mutual funds and accounting standards and
policies.
Complete freedom to AMCs to structure schemes In accordance wth
investor preferencesRemoval of quantitativerestrictions on investment by mutual funds and
replacement by prudentialsupervision.
Replacement of vetting of offer documents by filing.
Guaranteed return schemes by mutual funds perm~ttedprovided returns
including capital were guaranteed.
lndicatlon of expected returns based on hypothetical portfolio permitted.
Better governance of mutual funds through higher responsibil~t~esnd
empowerment of trustees as front-line regulators of mutual funds
Closer scrutiny through off site and on slte ~nspections.
Code of ethics for asset management companies
The impact of the n w regulations was immed~ately elt. Asset management
companies framed several schemes which made use of the freedom provlded to them
by the new regulations. Not only did the number of schemes filed wth SEBl increase
significantly in a short period of time, but also there was greater vanety in the
investment products offered. Therew s also a significant improvement in disclosures
in the offer documents.
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The new regulations have brought into greater focus the responsibilities of
trustees of mutual fun s who re uniquely positioned to promote the interests of the
unitholders and to ensure that mutualfunds are managed responsibly and ethically.
The trustees act independently to uphold the public trust In this process, trustees act
s the first level regulatonand re critical in helping to ensure theprofitability and
prognss of the mutual funds To assist trustees in their new role, and tos t out the
manner in which they could best perform this role, SEBl appointed a committee under
the chairmanship of ShnP K Kaul, former Cabinet Secretary and Ambassador to the
United States
SEBl is using its interface wth AMFI to assess the impact of the new
regulations on the working of mutual funds and to examine further ways ofimproving
the performance of mutual fundss as to restore investor confidence In them SEBl
also continued working wth MFI so that it becomes a more effective body
representing the mutual fund Industry and embarks on a campaign to sharpen the
industry s focus on the consumer.
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MUTUAL FUN S AND CORPORATE FINANCE
The private corporate sector in lndia is a deficit sector and the gap between
demand and supply of financial resources is met by funds ralsed through loans.
advances and issuance of securities. However, the buoyancyin the capital markethas
increased the reliance of the corporate sector on security financingThe share of this
Instrument in financing the resource gap of the corporate sector has more than
doubled between 1988-89 and 1991-92 from 16.72 per cent in 1988-89 to 36.28 per
cent In 1991-92 The changing pattern of corporate financing indicates that the
banking sector is losing its importance v i s -h i s the other financial sector (Including
mutual funds). According to the flow of fundsstatistics published by the RBI, he
share of the banking sector In filling the resource gap of the corporate sectorh s
decl~ned rom 54.42 per cent in 1988-89 to 23 per cent in 1997-98, while that of the
other financial sector (including mutual funds)has increased from 39.9 per cent to
102.58 per cent during the same penod. RBI has noted that The rap~ dgrowth of
mutual funds and Increase in t e n lending by OFIs(otherfinancial ~nstltutions) ppear
to have contributed to this trend . Dtrect financing by mutual funds to the corporate
sector has substantially Increased afier the SEBl guidelines allowed the corporate
sector to reserve20 per cent of pub l~c ssues for Indian mutual funds Mutual funds
have also widenedth 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 h d s in lndia have emergedas a critical institutions linkage among
various financial segments like savings, capital market and the corporate sector.They
' ~ e a a v e ank of India Flow of unds Accounrs of the Indian Ecoromy. 1988-89 to 1991-92 . Much 1995. Mumbu
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provide much nee e imp- to the money market and stock markets, in addition to
direct and indirect support to thecorporate sector. Above all, mutualf unds
have given
a new direction to the flow of personal savings and enabled small and medium
investors in remote m and semi-urbanareas to reap th benefits of stock market
~nvestments.ndian mutual fun s arc thus playing a very crucial development role in
allocating resources in the emerging market economy.
A mutual fund is generally seen as a portfol~omanager, managing the funds
of members. According to John chant (1992), A mutual fund offers investors a
proportionate claim on portfol~o f assets that fluctuates in value with the value of the
underlying collection of assets that make up theintermediaries portfolio. Like othertrue financial intermediaries, a mutual fund also analyses and identifies various
transformation services, and acquires better information to overcome transachon costs
to am ve at better risk-returnrelationship.
T h ~ s sk-return relat~onshipdepends on a vanety of social, economic andpolitical factors in the national and international markets. There 1s no certainty of the
occurrence of these factors. Therefore, ~nvestment ecisions need toe taken always
In uncertain situations.These uncerkuntles make Investmentdecisions a nsky venture
but the magnitude of nsk can be reduced, if not eliminated, by gathering pnor
information and suitably altering the decisions regarding the portfolio before the
occurrence of any situation adversely influencing the portfolio Information is
treated as a public good and like any other public good, supply of information is short
in a competitive economy, which makes it costly, very often beyond reach of
john Chant, The New Theorin of Fihlncid I n t a m e d i ~ n ,n K dowel and Meryn K N s4.1 I in F M u m i l l a h LDRdon 992
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~ d n d u a lnvestors Mutual funds as financ~al ntcrm ancs/portfoI~omanagers help
~nvestors by rendenng low cost servlces Mutual funds gather and process
~nformaQon,dentlfy Investment opportunltles, formulate Investmentstrategies Invest
funds and monltor progress at a very low cost The researcher makes an anempt to
examlne the role of mutual funds In risk mlmmlsatlon Ina sltuatlon of Investment
uncemntles, and the spec~fic dvantages that an Investor gets by lnvestlng in a
mutual fund
financial intermediary llke mutual fund can successfully and cost effechvely
~dentify roductive investment opportun~ties. mutual fundcan offer economies of
search and verification due to the size and scale of operations. Post-investment
monitoring is also very important to ensure that funds are properly and emciently
utilized for the comm~nedpwpose Monitoring IS a continuous process, Information
needs to be gathered on a conttnuous bass and that 1s cost effectively possible only In
an ~nstitutional etup mutual fund offers the Investorsa few benefits such as
Diversificat~on, professional management, Lower amount of paperwork and
administration, affordability and more importantly tax saving options, vls-a-vls
wes ting on his own.
Tax benefits play a cntlcal role in the investment decisions of the mutual fund
Investor. In India, the Government also appears to be keen to encourage Investment
In mutual funds This will encourage investors from seeking the intermediation of
mutual funds In the capital and debt markets, thus bringing in more funds for industry
and commerce. Perhaps the Government is also of the opinion that it willbe more
dlficult for the wrong kind of companies toraise money from gullible investors if
professional investors like mutualfunds are involved in the investment process.
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rhe t x benetits for investing in mutual fundsare as follows:
The 1999 budgethas made the mutual fund investor exemp from paying any
t u on the dividend received by him from the mutual fund, imspcctlve of thet y p of
mutual fund. This benefit is available underSec 10(33) of the IT Act. Since
Investors will be receiving tax-free dividends. the benefits ofSec 80L are no longer
relevant for mutual funds.
A mutual fund has to pay a withholdingtax of 10 per cent on the dividends
d~smbuted y 11under the rev~sedrovisions of the IT Act. In fact, the actualt x w
be per cent surcharge as well. However, l f a mutual fundh s invested more than
50 per cent of its assets Into equity shares, then it is exempt from paying any tax on
the dvidend distributed by it, for the next three years This benefit will give a boost
to equity based and balanced funds. On the other hand investors will do well to opt
for the growth option in the case of debt based funds.
The tax benefits offered by the government make it clear that mutual fund
investment today offers a very attrachve Investment opportunity to the Investor In
terms of capital appreciation,liquidity as well as t x benefits. The Investor has only
to identify the right type of mutual fund in which he can repose falth.
The immense benefits of investing in mutual funds have attracted investors all
over the world and the industryhas grown significantly, particularly since the 1980s.
The gmwh, however, is multidimensional in character, particularly in terms of
product preference, regulatory structures and management systems all of which have
been in fluenad by regional factors. The state of the economy, nature of the financial
' ~ b h i j i oy. Tu Benefits By 1nvMlng n unul Funds . m uuuvy 5 2OOO
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system, prevailing economic nd legal regulations and Investors preferences have a
slgn~ficant nfluence on the development of mutual funds in a country. In a given
economic, financial and social environment investors play the crucial role,
particularly in respect of product promotion.
GROWTH AN D PERFORMANCE O F MDIAN M U T U L FUNDS
This part of the chapter traces the growth and performance of the Indian
mutual fund industry from 1964, the year of launching of the first mutual fund UTI.
The industry has since witnessed the entry of public sector and private sector mutual
funds, the establishment of a regulatory authority, Securit~es nd Exchange Board of
India(SEBI), the promulgation of the Mutual Fund Regulations in 993 and other
regulatory measures for the healthy growth of the industry and Investor protection.
The growth of the mutual fund industry in India was very slow till the end of
the 1980s, primarily due to government controls and stiff regulation of the financ~al
services industry. State planning and development objective of the economic policy
meant that financialinstitutions assisted the government In developmental activities
through mobilisation of domestic savings. Severe entry bamers restricted the growth
of the mutual fund industry In terms of number of players, mobillsation of domestic
savings and creation of assets. This was the scenano till 1986-87 when the mutual
fund market in India, such as it was, solely controlled by a single institution, namely
Unit Trustof India(UT1) whichw s formed by the Government of Indiaunder an Act
of Parliament.U T commenced operations in July 1964, with a view to encouraging
savings and investment and participation in the income, profits and gains accruing to
the corporationfrom the acquisition, holding management and disposal of securities .
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PH SES O DEVELOPMENT
The mutual fund industry has wtnessed three interrelated stages of
development in terms of envy of players.
Phase 1-July 1%4-November 1987
Phase 11-November 1987- October 1993
Phase 111- October 1993 onwards.
The period between 1964 and 1987 was marked by the operations of a single
~nstitutions,UTI, which prepared ground for the future mutual fund industry' The
first decade of UTl's operations (1964-74) was the formative period. The first, and
still the most popular, product launched by UTI was U n~tScheme 64 Due to the
immense popularity of the Unit64, UTI launched a reinvestment plan in 1966 67.
Another popular scheme, Unit Linked Insurance Plan (ULIP), was launched in 1971
y the end of June 1974 there were 6 Lakhs unitholders withUTI The u n ~ t apital
totalled Rs 152 crores.
The period between 1974 and 1994 was one of consol~dation nd expanston.
In this penod UTI was deltnked from RBI. The period was marked by the
introduchon of open ended growth funds Six new schemes were ~ntroduced uring
1981-84. By the end of June 1984, the ~nvestible unds crossed Rs.1000 crore and
wltholders numbered to 17 lakh.
During 1984-87, innovative and wtdely accepted schemes like Children's Gift
Growth Fund (1986) and Master Share (1986) were launched The F~ rst Indian
offshorefund, India fund, was launched in August 1986. By the end of June 1987, the
Maniaha, Autobiographyof the Mutual Funds ndustry in India , January 13 999
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The Indian mutual fund industrybegan with the formation of Unit Trust of
India UTI) in 1963. The first mutual fund was Unit scheme64,
which is still the
biggest scheme. The UTI introduced several schemes almed at different sections of
people. The public sector monolith operated under monopoly conditions and In an
over regulated economy till the mid-eighties. In 1987, the commercial banks and the
Insurance Companies were also perm~ned o launch schemes. Among the publlc
sector banks, first to enter the Industry was State Bank of Ind~aMutual Funds
SBIMF) and Canara Bank Mutual Funds CANBANKMF) in 1987 With the advent
of this competit~onhe market witnessed sudden growth. Ind~anBank Mutual Funds
IndbankMF) and LIC Mutual Funds LICMF) entered the market in 1989 followed
by Bank of Ind~anMutual Funds BOIMF), Punjab Nat~onal Bank Mutual Fund
PNBMF). General Insurance Corporation Mutual Fund GICMF) In 1990.2 5 8 3
These schemes were rece~vedwith enthusiasm and more than Rs.6000 crores.
were raised in 1988-99. The nationalised banks sold thelr schemes were offered in
some schemes and this depos~t Assured returns were offered in some schemes and
this might have created a perception that mutual fundsare as safe as nat~onalisedbank
deposits. The boom continued into the nineties with the liberalisation evoking
positive response from the investors and actingas an add~tional atalyst for growth.
The cumulative mobilisation of resources went up from Rs. 4563.68 crore in 1987 to
Rs. 19,110.92 crores in 1990, a 319 per cent increase In 1991-92 mutual funds
moblliseda record Rs. 14,000 crores
The industry experienced its first setback after the stockmarket crash of 1992.
The annual gross mobilisation of the mutualfun s fell to Rs. 9,500 crores during the
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year. At that point, the market was further liberalised as Foreign Institutional
Investors were permitted portfolio investments.
During 1991, The Government felt the need for a regulating authority to
oversee capital market activities for the purpose of potecttng the interest of investors
In Ind~a,under the present framework, the regulation of all pluticipants in the
securities market is the responsib~lity fSecurities Exchange Board of I nd~a SEBI).
SEBl s basic objectives as the prime regulator of Capital market activities in India, is
to protect the interest of investors.
This objective has been stated in the preamble of the securit~es nd Exchange
Board of India, Act, 1991. Accordingly all the capital market act~vi tie s,ncluding that
the mutual funds, are covered under the above objective so far as investor protection
is concerned. The securities and Exchange Board of India (mutual funds) Regulations,
1993, came into effect on 20 January, 1993w s the first attempt to bring mutual funds
under a regulatory framework and to give direction to their functioning.
This period was marked by the entry of non-UTI public sector mutual funds In
the market, bringing In com pet it~on.W ~ t hhe opening up of the economy many publ~c
sector financ~a l nst~tutions stablished mutual funds in India However, the mutual
funds industry remalned the exclusive do ma~n f public sector in t h speriod
The growth of mutual funds Industry was jeoparadised by the crash in the
financial markets in October 1994, and the continued prevalence of bearish conditions
have hit mutual funds. During this penod only 4 Pnvate funds namely Tata MF
Reliance MF HBMF and Jardine FlemingMF entered the ~ndustry. Last six years
have been the most turbulent as well as exc ~ting nes for the industry. New playershave w m e in, while others have decided to close shop by either selling-off or merging
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with others. Investors preferences too have been changing. Product innovation is now
p s e with the game shifting to performance delivery In fund management as well as
service The nse of fund management industry is now bearing a significant impact on
some associatedareas such as distributors,banktng, other saving products, registrars
and transfer agents, to name a few.
The decl~nen UTI s share of inflows is, to some extent, inevitable, as it was
for long a monopoly, or shared the market withbanW institution-sponsored funds
whose performance was not encouraging. Even in 1994-97. the private sector funds
did not do well, and the UTImaintained ~ t s arket share. But in the last 18 months,
the decline In UTl s market share is very clear. The loss In market share 1s too steep
to be attributed to the virtual monopoly player ceding market share to new entrants in
the industry
The total assets under management In the mutual fund Industry,as of 31
December, were Rs. 97,000 crores In the first four months of 1999-2000,mutual fund
collections were Rs. 12,112 crores and net inflows accomplish for Rs. 4,875 crores
(Table 3.3). The UT accounts 76 8 per cent banki~nst~tution sponsored unds10.68
per cent and private sector funds 13 19 per cent Between March 1997 and July 1999,
the UTl s assets have increased by only 5.1 per cent as compared private sector
mutual funds share of 69.7 per cent. Those ofbankslinstitut~on sponsored unds
declined 0.4per cent during this period.
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Table 3 3
h nder Management Private Sector FundsShow Cood Growth
Rupees in Crores)
Fund Players March 97 March 98 March 99 June 99 July 99-
UnitTrust of lnd~a 53 886 57 554 53 320 81 000 60 527 5
I
Joint Ventures lndlan) 1 093 1 583 3 040 3 732 4 504 83.6
Private Sectw
Indian
Of the total assets under management, open-ended funds accounted for
54 4 per cent and closeended funds for45 6 per cent as of March 31,1999. The
pronounced shift in favour of open-ended funds in the last five years augurs well for
investors. The fancy is now for open-ended funds. They becamepart of the mutual
639
Change Over Previous
Period.
h d cene with the entry of private sector funds in late1993
1 031
Source: Credence, Mwnbai.
1 016
5.3
1 512
07
1 398
13.6
39.9
87
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igure 3 4
Types of unds and Scheme s on March 31 1999
Between new and existing schemes, the latter open and close-ended)
accounted for60 per cent to 89 per cent of the inflows in the various quarters of 1998-
99 and 1999-2000. This also polnts to the market preference for open-endedfunds.
Among the new schemes,the assured return ones accounted fora very large part of
the inflows.
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As seen From Table 3.5, the total resources mobil~sedby mutual funds during
1996-97 were lower atRs ,777 crore, compared to Rs. 6,508 crore In previous year
UTI remained the largest mobiliser offun s having collected Rs 4.204 crore from 7
new schemes. The balance was raised by other mutual funds through income, growth
and tax savings schemes. One mutual fund launched the first money market scheme
and several pension plans were under preparation. The performance of closed ended
schemes remained poor, with most schemes trading at discounts to Net Asset Values.
In the closing months of the 1996-97, there wasa sense of revival in the industry.
Table 3.5
Resources Mobilised y Mutual Funds
ivate Sector Mutual Funds
~tTrust of In d~ aUTI)
Source: Value Research -New Delhi.
The number of schemes filed with SEBI increased, and these were expected to
come to the market In 1997-98. There was a shift to open ended schemes,s well as to
fixed income schemes. Asof March 31, 1997 the total corpus of all 231 schemes of
domestic mutual hnds including the schemes of LlTI but excluding redemptions
repurchase of units, stood at Rs.85.822 crore, out of which the corpus of 74 schemes
of UTI alone stood at Rs.71.773 crores. Of the total corpus, Rs.3 1,938 crore were
accounted for by 76 income schemes, Rs.15,174 crore by 63 growth schemes,
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Rs.33.214 crore by 3 income cum growth schemes, Rs.5.283 crore by 59 equity
linked saving schemes and Rs.212 crore by 3 venture capital schemes.
As seen from the tables, UTI maintained 11s domlnant position in the Indlan
mutual fund industry. The share of private sector mutual funds, which are late entrants
to the industry, is still very low Today there are a plethora of schemesavailable In
t h ~ s ountry but the industry is still cons~d ered o be In its Infancy stage. The
innovative measures of mobilising resources have to be viewedIn light of the
following set of variables and constrains:
The main competitors to the mutual funds in terms of avenues of Investments
still remain the banks, followed by Company fixed deposits which are l~ke ly o die a
natural death on account of better tax benefits of mutual funds over fixed deposlts
The Bonds Debentures and Direct Equity optionsare also main contenders
Banks, pension funds and provident funds are restricted from lnvestlng in
equity funds. This requires to be rev~ewed.Also, cheque-writing facllity has so far
been allowed only In money market funds. This also needs to be reviewed
In the past, a large number of retail investors had a wrong notion about mutual
funds as an investment avenue. The benefits of risk dlvers~fication,professional
management and e se of administrat~on involved while Investing in mutual funds
were not clearly understood. Also, the risks involved while investing in stock markets
were not clearly understood. These are now being realised by the investors and the
intermediaries. The mutual fund industryhas to mature to offering comprehensive life
cycle financial planning and not products alone. It meansthat the mutual fund
industry has to go deep into the requirements and the needs of the investors at the11
various stages in the life cycle and offer products depending on the investors risk and
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return appetiteat these various stages. Table3.6 indicates the different Mutual Fund
segments and its growth).
Table 3 6
Indian Mutual Fund Industry A Snapshot
So, what does one look for in a mutual fund as an Investment avenue? Returns,
convenience of administration, nsk diversification, servlce and the needs at the
different stages in the life cycle. Whatever innovatlons are done have to be done on
the basis of these factors.
The industry has come out with products focused on retums,by designing
schemes that invest in stock markets, good corporate papers, Government securihes
and a combination of one or the two. The short-term, the medium-tern and the long-
term needs of investors have been catered to launching liquid funds, income funds and
equity funds The income funds are a better option over deposits, liquidfunds are a
better option over current account deposits
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Table 3.7
Sales Dataor
the Period April - Jun e 1999
Source: RBI Website.
So far, there have been ~nnovations n the structure suchas openznd, close-
end and interval mutual funds
At present, there are few new plans suchas, Systematic Investment Plan SIP),
Systemat~cWithdrawal Plan SWP). Payoll Systematic Investment Plan direct credit
from the salary account by the Company where the investor works), H~gher requency
of Dividends catering to regular incomevi a t x free mode), Dlvldend Re~nveshnent
Plan DRIP), Cheque-writing facility via tie-up with banks), etc, which are more
service oriented orconvenience oriented innovations.
Table 3 8
Net Assetso Open-ended and Close-ended Schemes
December 1996)
Source: nit rust of ndia unpublishedstudy. Bombay, 1996
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Table 3.9Investible Funds Share of Different Segments)
Rupees in Crores)
Source Fund Management through 1964-1999 Economic times Jan 2000
Table 3.10
Changing Fund Preferences
Assets in Percentage)
Indian mutual funds have close to Rs. ,00,000 Crore under 11s management.
The industry is dominated byUTI with its flagshipUS64 scheme. In the last4 years,
resource mobilization by mutualfunds has slowed considerably due to the adverse
stock market conditions.
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The total mobilisation by all mutual funds went up to Rs. 75050.21 crore by
March 1995. Bu the year 1995-96w s a disappoinbng one, there w s a drastic
reduction of total mobilisation (by all fmds and UTI) to Rs. 5976.3 crore and as a
result cumulative mob~lisation y 31 March 1996 stood at Rs. 81,026.52 crores.
From the Table 3.12 exhibited, The investors were having preference for
close-ended funds during 1995-96, Of the totalRs 70,947.55 crores investible b d s
excluding units 64 i.e. Rs. 50,678.24 crores, the closesnded funds could gamer
69.90 of total fund mob~liserl. Bui between 1996-98, therehas been an ~ncrmed
preference by the fund companies to launch open-ended funds, backed by an
improved ability to manage these. Even few well established funds like UTI's Grand
Master, Master Plus and Master gain 1992 and Kothar Pioneer mutual funds, have
opted to convert their close-ended funds into open-ended funds.
Tables 3.12
Mutual fund productm x
But during 1999-2000 fiscal, due to the reduced interest rate scenario and the
t w sops for the equity oriented schemes offered by the Government again the trend is
changing towards equity oriented close-ended funds.
According to data available on provis~onal asis, the mutual funds mobilised
Rs 22710.73 crore without adjustment of repurchase redemption during the
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financial year 1998-99. However, it is important to note that in case of open-ended
schemes, therew s
a continuos sale and repurchase by mutual funds, and there wasredemption of some of the schemes especially of unit 64 scheme of UTI.
Consequently, investible resources of mutual funds declined to that extent. So
after adjustment of repurchases and redemptions, there was an outflow of funds
of Rs 49.67 crore during 1998-99 Further analysis of data shows that while there
was a net inflow of funds of Rs. 1452.70 crores and Rs. 315.16 crores in case of
private sector mutual funds and public sector funds, respectively, there was a net
outflow of Rs. 2737.53 crore In case of the UTI the largest mutual fund. The outflow
would have been still larger for the year but for sharp increase in net mobilisation
during march 1999. De ta~ ls re glven in the Table 3.13
Table 3 13
Net-inflow of Funds of Different Segmentsas on March 1999
Source:SEBl
CUMUL TIVE POSITION OF NET SSETS OF MllTU L FUNDS
The Net Assets of all mutual funds aggregated at Rs. 90,685.25 croresas on
November 30, 1999. It wouldbe seen that inspite of large outflows from UTI, it is
still on top with 71 per cent of total outstanding assets of all mutual Funds followed
by private sectorfun s
Table 3.13) with 19 per cent and public sector settles at 10per cent.
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Table 3.14
Total Asseb of Mutual Funds as on November 30 1999Fund Particulars a Crores) Percentage( )
64637.37
Private Sector 17041.34
Public Sector 9006.54
Total 90,685.25 100
As regard to Net inflow of funds as November 1999, Pnvate sector mutual
funds stands first followed by UTI and then Public sector mutual funds.
RESOURCE MOBlLlSATlON BY MUTUAL FUNDS
It is very apt to track the funds mobilised by different category of lnstitut~on
namely, Bank sponsored, Financial Institutions sponsored, Unit Trust of Ind~a nd
Private sector mutual funds.
During 1992-93, taking into accounts all the eight mutual funds could garner
13,012 crores. Due to slump in the Capital Market thefunds mobilisation w s
affected and during 1997-98 it collected only 3305.4 crores. But due lo uptrend
noticed in the stock market because of certain encouraging measures initiated by the
Government. The resource mobilisation gotplcked up and reached a gross amount of
Rs 29,858.38 crores during the first eight months of the current tinancial year 1999-
2000 as against Rs. 14,288 crores In the correspond~ngperiod of last year and Rs.
22710.73 crores during the entire financial year 1998-99. AAer adjusting for
repurchases and redemptions, there was an inflow of funds of Rs. 1130.50crores
during the penod under review Apnl-Nov 1999) as against a net outtlow ofRs
949.67 crores during the entire financial year 1998-99.
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Table 3.15
F un d M o b i l k t i o n 31 December, 999
Rupees in Crores)
2. ata is provisional and subject to revision
foreign
Told W ll)+ Ill)nndTotal
A B C D
3. Figure rounded denotenumber of funds.
Source Rob ity Research 2
Note : I Assets under management ofUTI at book value
2 7100478300551200
478300558.300
3996
5196007870038700
1950 197000
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2 per m t rom 17 per cent October to 19 per cent in November 1999, while the share
of UTI has come down from 73 per cent to 71 per cent.
GROWTH ND OPER TION L HIGHLIGHTS
Table 3.17 shows the growth of the mutual funds industry in India between
March 1996.By the end of March 1996 out of the35 registered mutual funds only 24
were operational, out of whlch 10 were publ~c ector funds and 14 private sector
funds. The total number of mutual fund schemes in India went up from 47 in March
1990 to 197 in March 1996, indicating a growth of 319 per cent during the six year
period. The share of UTI however declined from 61.7 per cent to 34 per cent during
this period. The inevitable resources or corpus) of all mutual funds increased by 367
per cent between 1990 and 1996,i.e., from Rs 17,398 crore toRs 1,026.52 crores.
Table 3.17
Growth of Mutual Fund Industry March199 to March 1996)
Noteestunated
Source SEBI tate of CapitalMarkets 1989-90and Annual Report 1995 96
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As on March 31,1996, the estimated number of investor populationw s 588
lakh out of which about 480 lakh 81.63 per cent) were withUTI, 76 lakh 12.94 per
cent) with public sector mutual funds and the rest 32 lakh 5.43 per cent) with private
sector mutual funds.
Mutual Fund 2000, a report brought by SEBl gives the profile of investors in
Indian mutualfunds It is seen that individual investors accounting 61 per cent of all
mutual fun investors dominated the industry. This was followed by the corporations
27 per cent), trusts 4 per cent) nd other investors 8 per cent). The region-wise
bifurcation of investors indicates that the west has the highest share 37 per cent), in
total mutual fund investors, followed by the north 24 per cent), south 23 per cent),
east I4 per cent) and other 2 per cent).
The cumulative mobilisation of resources by the mutual funds which indicates
an over-all increase from Rs 4,563 68 crore in 1986-87 when only UTI operated) to
s 1,02,529.52 crore in 1997-98). The Institution-wise distribution of resource
mobilisation upto March 1998) ind~cateshat UTI mobilised 84per cent of the total
resources followed by public sector mutual funds 106 per cent). During 1998 the
private sector mutual funds could gamer more funds compared to previous years.
The year-wise mobilisation of resources up to March 1998 by Indian mutual
funds indicates a more or less positive trend, except in the year 1993-94 and 1995-96
when, as earlier noted, the yearly mobilisation declined by 34.1 per cent and 51.2 per
cent respectively.
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Table 3 18
Gross Cumulative Resources Mobilisedby Indian Mutual Funds (198&98)
Source:SEBI: Mutual Funds 2 Report and Annual Rcpon 1995- .
Rupees in Crores)
During April Dec,1999 gross lnflows into mutual funds were Rs.35915 crores
as against Rs.16288 crores in Apr-Dec 1998. Net ~nflows into mutual funds
amounted to Rs. 12,194 crore over the same period as against an outflow of Rs. 950
crore dunng the whole of 1998-99. Sector funds emerged for the first time, covering
sectors such as ~nformat~onechnology, pharm aceut~cals , nd FMCG) Fast movlngconsumer goods. Dedicated Gilt funds with100 per cent Investment in government
securities were introduced, increasing the accessibility of the gilt market to small
investors.
Wtth a view to encourage small investors and invigorate Capital markets, allincome from UTI and other mutual funds received in the hands of the investors were
p to
( I )198687
1987-88
1988-89
1989-90
19'32-91
1991-92
1992-93
1993-94
1994-95
1995-9619 -97
1997-98
Note Outtlowof funds IS not incorporared
U T I
2)4,563 68
6,738 81
11.834 65
17,650 82
21.37648
31,805 69
38,976 81
51.978 00
61.500.00
67,492 0077,92 W
86,192 00
PublicSector M
(3)
1,621 00
1.460 00
1.683 97
5,674 51
8,011.2I
8,407 21
10,550 21
10.451 4010,602 21
10.934 40
PrivateSector M
(4)
916 00
3,000
3.083 I ?3,429 12
5.403 I ?
Tol8l(W4)
5)
1.621 00
1,46000
1,683 97
5,674 51
8,011 21
9,323 21
13.550 21
13,534.5214031 52
16,337 52
Totalt+-4)
(6)4.563 68
6,738 81
13,455 65
19,11065
23.060 45
37.480 20
46.988 02
61.301 21
75,050 21
81,026 5291123 52
102529 52
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fully exempted form Income tax. But the income distributed by mutual funds, where
the equity investment is less than 50 per cent i.e debt funds)w s subjected to 10 per
cent dividend tau. This has increased the mobilisation of funds by the mutual funds.
The resources mobilised by mutual funds under different schemes are
ment~oned elow. The 62 income schemes 3 1.47 per cent of the total) mobilised
34.11 per cent of the funds of the total of RS 81,026.52 crore) whereas. the 27
income-cum-growth schemes 13 per cent) garnered 40.97 per cent of the total
funds Although the growth schemes entered the market relatively later, they made
good progress. p to March 1996, 55 27.92 per cent) growth schemes had mob il~sed
18.41 per cent of the total funds The tax-saving schemes, ELSS 25.38) could only
manage 6 43 per cent of the total funds due to the maxlmum limit RS 10,000) wh~ch
S entitled fort x benefit.
The above mentioned data reveals that there is still a vast scope for mutual
funds to tap the Indian savings market A strategic move in the field of marketing by
mutual funds is needed forke ep ~n g n view the macro-economic development and
G P growth in the country