CHAPTER 111

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)'vlew the role of financ~alinstitutions as 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~onof

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~cesand it is in this respect that
financial arrangements such as an issuing market for securities and financial
intermediaries play their roles. According to Kauhan (1986)' financial institutions
are expected to embody the essence of integrity and their entrepreneurial drive is well

'

Gucrley and Shaw, 'Financial aspecls of Development',CIRenew,

v0145, 1955, pp 515-539
p h k a , 'A comparative study on Financial Development' in Rym Sato (ed).
I
'
, Academic R w Tokyo. 1987
oNload Small Company Growth Fund". hldl&2URewn.1986

'

balanced by a strong sense of fiduciary responsibility and that is why financial

regulations have always been a part of economic development.
Mutual funds are dynamic financial institutions (FIs) which play a crucial role
in an economy by mobilising savings and investing them in the 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 and inter-mediation. They mobilise funds from the
savings market to deploy the same in the Capital Market. Mutual funds act as
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, the 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 access to international
capital markets, and the flow of international savings into India has thus cleared the
path for integrating the Indian market with global capital markets. Globalisation has
increased the scope of competition, technological change and investor-fnendly
research, which in course of time should increase the efficiency of lndian institutions,
reduce the cost of operations and encourage better resource allocation.

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. An 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~csector financial institutions in the
organised sector can be grouped into the following broad categories.(Figure 3.1)

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.
s
They provide life and
general insurance, mobilise funds and invest in capital markets. They arc important

institutional investors in India.

mAND MUTUAL m s
There arc 35 mutual fund families (including UTI which is the oldest) in India.
The three categories of mutual h d s are public sector mutual funds, domest~cprivate
sector mutual funds and foreign mutual funds. They have emerged as 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 Financial Market
MINISTRY OF FINANCE

Institutions

Financial
Institutions

h
Exchange Board

Sectoral

Investment
Institutions

TFCI
NABARD

SIDCs

1i

Stock Exchange
Merchant Bankers
Underwriters
Stock Broken
Retail Investors
Flls

GNP, SAVINGS AND THE CAPITAL MARKET IN INDlA

Financial institutions are an integral part of the economic smcture in any

counhy. While they assist financial deepening they are 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, India has
achieved significant success in economic powth and its GDP (at factor cost) at 198081 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), which was 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), 5 8 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 reversed the deceleration in growth seen in
1997-98. The GDP (at factor cost) growth accelerated to 6 8 per cent in 1998-99 from
5 per cent in 1997-98.
Gross domestic savings declined sharply in 1998-99 to 22.3 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
counterpart of the higher consumption growth during 1998-99.

Data Regrrding GDP. GNP. Pwupita income, u s , hn.s b a n taka from Economic survey

199''-95,1995-% ud 1996-97.

In spite of a high growth in population, per &ta

Nu

N a t l o ~ lProduct

(NNP) went up from Rs. 1,126.9 in 1950-51 to over Rs. 2,573.2 in 1995-%. The
growth in GDP. GNP and per capita Income have had a positive lmpct on financial
act~vities,particularly on the savings market The changlng nature of flow of funds
and sauctwal changes In the savings and capital markets In lnd~aIS to e m l n e d

THE SAVINGS MARKET

Funds flow analysis indlcate a changing trend in the relative importance of

financial institutions, and households' preference of financial institutions and
instruments. The change becomes more clear ~f one examines the growth and
development of thc savings market over a penod of t~me
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
1950-51 to Rs 1,29,999 crore In 1990-91, and to the all-t~mehigh of Rs 2,8l,014 crore
in 1996-97'
GDS as percentage of GDP In India IS one of the h~ghestIn the world, and has
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 overall rate of growth of savlngs

as percentage of GDP has fluctuated, it has always remained above 2 1 per cent since
1988-89.

' World

Emerging Band Mvlret - Idu June 1995

The healthy growth of savings In India has been boosted by the howhold
sector which has contributed a substantially high percentage to total domest~csavings

The contribution of this sector went up from 73.7 per cent In 1950-51 to 84 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~ancs
assist the
transfer of savings to the real sector of the economy through the format~onof financial
as-.

The change indicates that household savings in gross financ~alassets went up

94. though they declined to 59.56 per 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 It can
be seen from the data In Table 3.1 that 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~vesavlng 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~dinvestment like LIC, PF and pension increased
marginally fiom 25.1 per cent to 27.2 per cent during the same of penod However,
depressed conditions in the stock market affected mutual funds' rnobilisation along
with the other capital market instruments, and in 1996-97, the share of the former was

o 2 per cent, and the latter 3.9 per cat, ideating a change in favour of less risky, less
l~quidand more assured returns.
Table 3.1
Instrument-wise Ditribution of Hourbold Aaaetc

Non-Bank

37800
(3 10)

L~felnsuram
funds

915.00 5599.00 7114.00 9548 00 1134400 13481 00 12623 00

(7 0)
(9.50)
(870)
(8 30)
(8.80)
(8 10) (10 80)
2122 00 11155 00 14817.00 18248 00 2061900 25438 00 27442 00
11750) 11890) H840) 11670) 11480) 12040) (1790)

Prov~denland
Penslonfunds

Clams on

Government

Shams and
Debentures
Un~tsof uTI

128600
(2 20)

603500 1165400 1174300 1707900 2573300

(840) (1370) (1680)
(7 50) (10601

deposits

794200
(13 50)

41200

497200 821200 1006700 846100 588000 600300

(84011 (10201/
(921/
(6 rod
(4 7001
(390i

3100
(0 30)

343800
(580)

394900
(4 90)

678400 1322200 1087300 1198700

(8 70)
(7 80)
(6 20)
(9 50)

71200
(590)

561200
(7 00)

470500
(4 3)

390800
(2 80)

26200
(020)

30200
(020)

3W00 266700
45300 -139800 -119000 -160000
(1 1)
(020)
(1 70)
(1 70)
(1 1)
(48)
Note P = Rovis~onalFigures in brackets d c a t e Dcrccntanc to uoss financial assets
Source: Rcocrvc Bank of Gdia, Curracy and ~ i o w k19%-97

Trade Debts

37300
(3 10)

THE CAPITAL MARKET

An analysis of shvctwal changes in the savings market indicates the growlng
importance of capital market instruments like shares, debentures and w t s in
household financial assets. Growth and stability in the capital market are vital for
efficient m u r c e allocation, i.e., the transfer of resources from the savings market to

the real sector of the economy

Two important constituents of the capital market are primary market (or new
market) and secondary market. Figure 3.2 shows the structure of the secuntics
market in India. The primary market helps both wrporates and the government to
! i d s by issuing securities. The secondary market, through continuous t d n g

activities, provides liquidity in the system. The secondary market is also s reflection

of the changing mood and perception of investors. As can be imagined, stabihty and
growth in the capital market depend on the efficient functioning of both the markets

slnce they are closely interdependent Mutual funds play an all-important role In both
the markets and strengthen the hansfer mechanism.
Figure 3.2
Structure of Indian Securities Market
Saurities ad Exchange Board of
Indin

GI
Primary

Corporate
Sector

Corporate
Saror

New lwes
Rieht Issues
Debentures
Units of U T M

Saor

Dsbentures
lnnitutional
lnvesrors

Unils of U T M

The Securities and Exchange Board of lndia (SEBI) has brought out several
regulations to improve the efficiency and quality of the capital market. The SEBI
~ cpromulgated
t
in January 1992 encompasses the entire gamut of secunties Industry
In India. The other regulations are: 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~onof 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. By 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)and its position In total
value traded was 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

lntroducti~lof index features and other derivatives and strengthen the legal
framework for regulating collective investment schemes.

The securities laws (Second Amendment) Act, 1999 amends the SCRA, 1956,
(he SEBl Act 1992 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)ln~tial
Public offers was replaced by an "ability to pay" criterion The "Par Value" concept
was abandoned

so that companies can now issue shares of any value. Companies

wth dcmated shares can alter the par value indicated in the Memorandum and
Articles of Association. Existing companies with shares of Rs. 10 or Rs 100 can

avail of this facility by consolidat~ngor splitting these shares. SEBl had ~ssued
gu~del~nes
for the credit rating agencies In th~scomect~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~veautomatic approval system for FDI, based on a negative 11st and
transparent sector limits introduced. The Foreign equity limit for FDI through
automatic route for drugs and pharmaceuticals raised to 74 per cent from the present
5 per cent.'

' SEBL,2000
' Eoommic Timcr b i l y Published by E c o ~ m i cTima Reourch Buruu

An automatic route was opened for the 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 reforms as prt of the
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 financial institutions Into India.

THE PRIMARY MARKET (NEW ISSUES)

Changes in economic policy involving opentng up of the Ind~aneconomy,
freedom to corporate sector to approach capital markets to fix prices and premiums
and public sector disinvestment programmes have glven a much-needed boost to the
primary market. The total amount of cap~talissues in the market went up from Rs
?1,673.6 crore in 1992-93 to Rs 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)also 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 the last 5 y m .
The number of listed Companies has been rising continuously. Despite a fall in BSE

Bomhy Stock Elccbngc. Stodr Mvksts w h y . 1997

sensex dunng 1997 as compared to 1994 the total volumes traded in during the same

nearly doubled. However, the amount raised through pnmary capital issues
rnntinues to fall due to negative investor sentiment.

THE SECONDARY MARKET

The growth of the primary market in the post-reform period has 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 ~nvestors'sentiment and direction

of economy. In the post-reform period, particularly 1992, the market wtnessed a
bullish phase and the 30-share sensex reached a peak of 4,467 on 22 April 1992
tlowever the movement of ind~ceswas moderated subsequently in 1993-94. One
of the sign~ficanthappenings during this period was also a moderation in PIE ratios.

cons~deredto be the most important determ~nantof Investment dectsion. The PIE

ratio which reached its peak in 1994 gradually came down and m December 1996 it
touched its lowest when sensex PIE was 16.57 and Natex P E 12.20. The lower PIE
ratlo was an attractionto foreign investors (Table 3.2).

Tabk 3.2
Stock Market ladiaton
PIE R ~ I O

Index

lM1ator8

U I x

Snmx

N U

c'W$yry 1
t

-rmw

N u

(Rs Cr)
t1992

382475

Aprll

185581

4643

3949 78

1876 13

4645

3598 66

'

1649 6

19 57

Demmbr/ 2918681 1290211

122

December

1996
April

345

206364868

38 58

423 4,oO 000

20 14

371 6 36 868

11781

3861477,425

@ ESIIMI~for dl-lnd~a
Saucx (Base 1978-79 = I W)
Nua (Bue 1983-84 IM))
Source Govmrnent of Ind~a.
Mlnlstry ofF~nance.Econom~cSurvey, 1993-94.1994-95. 1995-%

hide

The stock market indices clearly exhibits the changing investor behav~oursand
the role of capital market in guiding the economy. The BSE sensex which was ruling
around 700 points In the year 1990 surged ahead and reached 3500 mark In the year
1998. Further it went upto 6151 points during the end of Year 2000 due to the

unprecedented escalation in the prices of software and pharmaceutical scnps At

present its ruling around 5141 mark as of march 2000. The

BSE National Index

reached as high as 3000 mark and now ruling around 2900 mark The NSE ~ndexhas
changed from 347.44 in 1990 to around 1000 polnts in 19Q9

BSE National Index (Natex) represents 100 companies. &tween 1990 and
1994, 11mult~pliedby over 5 times. Since then, it has been on the downtrend In the
tint 9 months of 1998. BSE Natex has fallen by 5.4 per cent.
BSE Sensex represents 30 companies Recently the sensex was 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, MARKET

The lnd~an financ~al lnstltutlons have played a domlnant role In assets

format~on and ~ntermed~at~on,
and contnbuted substant~ally In

macroeconomic

development of ow countr) In thls process, lnd~anmutual funds have emerged as

strong tinanc~al lntermedranes and are playing a very tmportant role In bnnglng
stablllty to the financ~alsystem and effic~encyto resource allocation Mutual funds
have opened new vlstas to investors and ~mpartedmuch-needed l~qulhtyto the
system In the process, they have challenged the h~thertodomlnant role of commercral
banks In the Ananc~almarket and nat~onaleconomy An attempt

IS

made In thls

chapter to examine the rnult~d~mens~onal

role of mutual funds In the financ~alsector
In lnd~a Further the study

IS

focused towards the growth prospects and the factors

that acts for and against the future of the Industry

MUTUAL FUNDS AND HOUSEHOLD SAVMGS

Mutual funds arc the fastest growng institutions in the household savings
sector. Growing complications and risks In the stock market. nsing tax rates and
~ncreasing inflat~on have pushed household towards mutual funds The present
share of mutual funds In household financial assets

IS

over 17 per cent in the

USA, 10 per cent in Germany, 8 per cent in Japan, 4 per cent m Italy and about 8
per cent in India. The share of mutual funds in personaL'househoId savings is om
~ndicatorof the imponance of mutual funds In 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 USA was held in financ~alassets; by 1992 this had risen to 63 per
cent. Meanwhile equity and bond mutual funds soared from less than 1 per cent of per
cent of personal Rnanc~alassets in 1980 to nearly 6 per cent in October 1993

'

In

1992, the share of mutual funds in financial assets in the USA was 5 4 per cent as
against 0.7 per cent in1980 The share of other utmments, 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 year 1999
The fierce competihon between mutual funds and the banking tndustry tn the
USA has caused a severe fall In bank depos~ts.In 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~quatedregulatory structure(s)
cannot' (Laderman and Simth 1993).' A similar trend in the flow of funds from

' Eanomic Timn. Spsjrl Repon. Munul Funds. Oooba 9. 1995

StUiniul Abnna of the United S t a a . 1995 [ I 15' Edition] Auwih TN)
'bdcaum, ad Smith. 'Ths P o w of Muaul Funds'. Bwma,.l u u q lo. 1993

banking to mutual funds has b 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,there has been a steady Increase In the share of mutual funds In

household savlngs (tinanclal assets) slnce 1988-89, I e , after the e n y of publ~csector
mutual funds Gross savlngs of the household sector In financ~alassets Increased from
Rs 12.1 18 crore In 1980-81 to Rs 1.35,348 crore In 1994-95 The bank~ngsector IS the
s In the savlngs market has decl~ned
most dominant In the savlngs market but ~ t role
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 to 7 0 per cent In 1992-93 (but decl~nedto 2 8 per
cent In 1994-95) The percentage share of eqruty 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 sdecl~nedfrom 45 8 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~shperformance 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 mobllise a record

Rs.14,000 crores. Movlng In tandem with the setback in the stock market In 1992. the
gross mobilisation of the mutual funds fell to Rs. 9.500 crom. The penod also
witnessad the entry of Foreign lnstitut~onalInvestors Into the arena of portfolio

investments.

' Scumtiesand Exchnge B

d of India, Annul Rcpon 19-34-93

As it is the inherent nature of the mutual funds 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 of over 10 per cent in 1988-89 But the s~tuationrapidly changed
during 1990 and culminated In the lowest nal 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 mere 7 4 per cent In 1950-5 1 to 18 5 dunny 1998-99
Dunng the penod 1992-95, the financ~almarket was agun upbeat, wh~chlead
to a tremendous growth In pnmary market Annual moblllsat~onfrom equ~tyIssues
crossed Rs 36,000 crore In 1994-95, as against Rs 18,100 crore ralsed In 1992-93 As
expectations from equltles roared, mutual funds mob~llsat~on
remalned high dunng

the penod 1993-95 As the number of equtty-based mutual funds grew, these were

aggressively sold, wthout much attenhon bang pa~dto educat~ngthe retall Investors
about the volahllty of thls category In 1998, the resource mobll~sat~on
wlwssed a
renewed growth Currently, there are over 34 mutual funds organlsatlons In lnd~a
manaengover Rs 1,00,000 crores through 450 odd schemes

The active role played by the mutual funds in promoting economic

development can 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 mutual funds play a

pivotal role in promoting a healthy capital market. Mutual funds increase liquidity in
the money market.

STRUCTURE OF INDIAN MUTUAL FUNDS

In developed counhies like the UK 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 the UK
follow the 'trust approach' while close-ended schemes (Investment Trust) 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

Structure of Indian Mutual Funds

Establishes MF as a
Trua Register MF with

Board of
Twta

Hold Un~tholdersFund in
MF Enlure Complimce to
SEBI Enter into Agreement

-*

-L

Appointed by
Baord of
Trustee

Hold Unitholders Fund in

MF Ensure Compliance to
SEBI Enter into AgT~mCnt
HWith SEBI

Appointed by
Trustee

L
Provides Necessary
Custodian Service

+
Appointed by
Trustee

Pmvide Banking Scrv~ce

Appointed by
Trustee
Agents

Serv~ecand an as a
Transfer Agents

SEBI AND MUTUAL 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~nistrativeentities
like banks, registrars and transfer agenu.

Regulations, 1993, which came into force on January 20, 1993. The
regulations have since been replaced by the Securities and Exchange Board of India
(Mutual Funds) Regulations. 1996. through a notification on 9 December 1996.
As per SEBI Regulations, 1996, a mutual fund is to be formed by the sponsor
and registered with SEBI. 'A mutual fund shall be constituted In the form of a trust
and instrument of trust shall be 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 from the AMC, as well as a quarterly report on its activities
They can also dismiss the AMC under specific condition as per SEBl regulations. At
least half the hustees should be Independent persons. The AMC or its employees
cannot act as a trustee. No person who is appointed as a trustee of a mutual funds can
be appointed as a trustee of any other mutual fund unless he is an 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
trustees can be removed only with prior approval of SEBI.

The regulations deal with various issues relating to the launchng. advertising
and listing of mutual fund schemes. All the schemes to be launched by an AMC need
to be approved by the trustees and copies of offer documents of such schemes are to
be filed with SEBI. The offer documents shall contaln adequate disclosures to enable

investors to make informed decisions. Advertisements In respect of schemes should

be in conformity wth the prescribed advert~sementcode of SEBI.

The listing of close-ended schemes

IS

mandatory and every close-ended

scheme should be listed in a recognised stock exchange wthin

SIX

months from the

closure of subscription.However, I~stingis not mandatory.

If the scheme provides for per~od~c
repurchase 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 scheme can be repurchased or reissued by an AMC.
Units of a close-ended scheme can also be converted into an open-ended scheme.
Uruts of a close-ended scheme may be rolled over by passing a resolution by majority
shareholders,

No scheme other than unit-linked scheme can be opened for subscription for
more than 45 days The AMC 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

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 can be provided in a scheme if such a return is fully
guaranteed by the AMC or sponsor. In such cares, there should be a statement
indicating name of the person and manner in which the guarantee to be made must be
made in the offer document.

NEW RECUWTIONS FOR THE DEVELOPMENT OF MUTUAL FUNDS

INDUSTRY PROPOSED

The equity investment In a company by a mutual fund should be 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 in case of sector or industry specific scheme In such
cases, the limit shall be 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 has 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 hAdvisory
,
Committee MI Murd Funds - Nm Resulations for
Dcvclopmenc of Mutud Fund lndurtry Ropoxd". November. 1999. Dh.n.com Money line

Ilu

of a single issuer. The committees recommended that the investment on debt

insbument issued by a single issuer be restricted to 15 p r cent of NAV of the scheme
and this limit may be extended to 25 per cent of the NAV of the scheme with the pnor
approval of the board of the asset management company (AMC) and board of
trustees Again exceptions to the proposed rule are government secunties and money

market instruments. The committee also recommended to restrict the ~nvestmentin

unlisted shares to a maximum of 10 per cent of the NAV of the scheme in case of
close ended scheme and In case of open-ended schemes the list may be made more
stringent to 5 per cent of the NAV of the scheme as there is continuous purchases by
Investors In 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 of a scheme
and this limit may be extended to 25 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 25 per cent of the NAV of all of its schemes in the listed secunties of
group companies of the sponsor This provlslon is liable to be 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 be wthin the 25 per cent limit of all ~ t sschemes
Therefore, the committee recommended that such h i t of 25 per cent should be for
NAV of each scheme separately and not for all the schemes of a mutual fund put
together.
About change in controVfundamental attributes in case of an open ended
schemes: under the existing regulations in case of change in control and change in

fundamental attributes, 314th of the unitholden approval is required Mutual funds

have rtpnsentcd that this clause may be relaxed in the case of open ended schemes as

the unitholden have an exit ophon throughout the life of the scheme. If the investon
do not agree to the changes proposed by the mutual Fund they can exit at any time at
h e prevailing NAV.
A pre-condition for such change may be that the unitholders should be
Informed by way of individual communication and through advertisements in the
newspapers. The committee considered the proposal and found acceptable. The
committee further recommended that the mutual funds should disclose at the 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 ~ssueslead 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~attonof mutual funds In lndta (AMFI) has submtned a senes of
recommen&uons to Secunt~esand Exchange Board of lnd~a(SEBI) for upgrading the
standards of Indtan mutual funds Industry to the tnternat~onallevels 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 Suggats Swaping Change in the Mutual Funds Stududs for the New Millennium

- Dhnmm, M m y Line, J

M U 2W0
~

formulate proposal for ~ndividdretirement plan and review impact of c d t policy

measurn.
In the case of disclosure, the AMFl has suggested SEBI norms for mandatory
semi-annual disclosure to mutual funds. Currently the mutual fund regulation
l
sent
provides for disclosure of full portfolio in the balance sheet and the a ~ u a repon
to the unit holders once a year. Now in order to enhance the level of disclosure
standards and to bring it on par wth 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 AMFl committee 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~rculateda paper titied
"Mutual Funds 2000" 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 the recommendations 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 revised and the new regulations notified in December 1996.

The SEBl (Mutual Funds) Regulations. 1996. The revised regulations

embodied far reaching changes in the regulation and functioning of mutual funds. 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 awre of nsks and rewards
Standard~sationof norms for valuat~onof 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 preferences
Removal of quantitative restrictions on investment by mutual funds and
replacement by prudential supervision.
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~esand
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 new regulations was immed~atelyfelt. 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. There was also a significant improvement in disclosures
in the offer documents.

The new regulations have brought into greater focus the responsibilities of
trustees of mutual funds who are uniquely positioned to promote the interests of the
unitholders and to ensure that mutual funds are managed responsibly and ethically.
The trustees act independently to uphold the public trust In this process, trustees act

as the first level regulaton and are critical in helping to ensure the profitability and
prognss of the mutual funds To assist trustees in their new role, and to set out the
manner in which they could best perform this role, SEBl appointed a committee under
the chairmanship of Shn P 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 of improving
the performance of mutual funds so as to restore investor confidence In them SEBl
also continued working wth AMFI 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.

MUTUAL FUNDS 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 buoyancy in the capital market has
increased the reliance of the corporate sector on security financing The 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 vis-his the 'other financial sector' (Including
mutual funds). According to the flow of funds statistics published by the RBI,'the
share of the banking sector In filling the resource gap of the corporate sector has
decl~nedfrom 54.42 per cent in 1988-89 to 2 3 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(other financial ~nstltutions)appear
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 reserve 20 per cent of publ~cissues 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 h d s in lndia have emerged as a critical institutions linkage among
various financial segments like savings, capital market and the corporate sector. They
' ~ e a a v eBank of India, 'Flow of Funds Accounrs of the Indian Ecoromy. 1988-89 to 199192". Much 1995. Mumbu

provide much needed imp-

to the money market and stock markets, in addition to

direct and indirect support to the corporate sector. Above all, mutual f'unds have given
a new direction to the flow of personal savings and enabled small and medium
investors in remote ml and semi-urban areas to reap the benefits of stock market
~nvestments.Indian mutual funds 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~oof assets that fluctuates in value with the value of the
underlying collection of assets that make up the intermediaries' portfolio. Like other
true financial intermediaries, a mutual fund also analyses and identifies various

transformation services, and acquires better information to overcome transachon costs

to amve at better risk-return relationship.
Th~snsk-return relat~onshipdepends on a vanety of social, economic and
political factors in the national and international markets. There 1s no certainty of the
occurrence of these factors. Therefore, ~nvestmentdecisions need to be taken always
In uncertain situations. These uncerkuntles make Investment decisions 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

(4.1

'john Chant, 'The New Theorin of Fihlncid I n t a m e d i ~ n 'in

, K dowel and Meryn K L N s
I
,-c
innlhiF
Mumillah LDRdon, 1992

~ d n d u a Investors
l
Mutual funds as financ~al~ntcrm&ancs/portfoI~omanagers help
~nvestors by rendenng low cost servlces Mutual funds gather and process
~nformaQon,ldentlfy Investment opportunltles, formulate Investment strategies, 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 In a sltuatlon of Investment
uncemntles, and the spec~ficadvantages that an Investor gets by lnvestlng in a
mutual fund
A financial intermediary llke mutual fund can successfully and cost effechvely

~dentifyproductive investment opportun~ties.A mutual fund can 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 ~nstitutionalsetup A mutual fund offers the Investors a few benefits such as
Diversificat~on, professional management, Lower amount of paperwork and
administration, affordability and more importantly tax saving options, vls-a-vls
westing 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 will be more
dlficult for the wrong kind of companies to raise money from gullible investors if
professional investors like mutual funds are involved in the investment process.

rhe tax benetits for investing in mutual funds are as follows:'

The 1999 budget has made the mutual fund investor exemp from paying any
tau on the dividend received by him from the mutual fund, imspcctlve of the t y p of

mutual fund. This benefit is available under Sec. 10(33) of the IT Act. Since
Investors will be receiving tax-free dividends. the benefits of Sec. 80L are no longer
relevant for mutual funds.
A mutual fund has to pay a withholding tax of 10 per cent on the dividends
d~smbutedby 11 under the rev~sedprovisions of the IT Act. In fact, the actual tax wII
be I I per cent surcharge as well. However, l f a mutual fund has 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 tax 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 industry has 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 influenad by regional factors. The state of the economy, nature of the financial

' ~ b h i jRoy.
i
'Tu Benefits By 1nvMlng In Munul Funds".

m.Juuuvy 5.2OOO

system, prevailing economic and legal regulations and Investors' preferences have a
slgn~ficantinfluence 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 AND PERFORMANCE OF MDIAN MUTUAL 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~esand Exchange Board of
India(SEBI), the promulgation of the Mutual Fund Regulations in 1993 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 financial institutions 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 Trust of India(UT1) which was formed by the Government of India under an Act
of Parliament. UTI commenced operations in July 1964, 'with a view to encouraging
savings and investment and participation in the income, profits and gains accruing to
the corporation from the acquisition, holding management and disposal of securities'.

PHASES OF 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 Un~tScheme 64 Due to the
immense popularity of the Unit 64, UTI launched a reinvestment plan in 1966 - 67.
Another popular scheme, Unit Linked Insurance Plan (ULIP), was launched in 1971

By the end of June 1974 there were 6 Lakhs unitholders with UTI The un~tcapital
totalled Rs 152 crores.
The period between 1974 and 1994 was one of consol~dationand 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 ~ntroducedduring
1981-84. By the end of June 1984, the ~nvestiblefunds 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 Industry in India", January 13. 1999

unit Capital of UTI was worth RS. 3.726.1 1 cmre and lnvestible funds totalled over
RS. 4,563 crore, while unitholding accounts were 29 79 lakh.
Towards the end of the 1980s, winds of change had started blowing in the
lnd~aneconomy. UTI was one of the few organisations to prepare itself fully to face
the emerging challenges In the followng years tt launched all-round dtverstfication
programmes through backward and forward integration In order to retain its posit~on

as the undisputed market leader. And at present i.e. 1999-2000, UTI manages an
aggregate portfolio of Rs. 63.548.02 crores and services 45 million Investors accounts
under 90 savings schemes catering to varying needs of different classes of investors.'
UTI has reported a net income of Rs 2577 Crore for the Quarter ended September 36
1999 Rs 1491 Crore to Rs. 6001 Crores.
The Indian mutual funds Industry has recorded a tremendous growth

in

size

dunng the last 10 years with cumulative resources mobilised rising from mere
Rs.4563 Crore In 1986 to over Rs.85.822 Crore in 1997 and subsequently Rs.97,000
Crore as on 3 1" December 1999.'
Startlng \nth an asset base of Rs. 25 crores In 1964 the industry has grown at a
compounded average growth rate (CARG) of 29 per cent to its current size of
Rs. 1,13,005crores as on March 31,2000. A lone UT1 w~thjust one scheme In 1964,
now competes with as many as 450 odd products and 34 players in the market.
lnspite of the stiff competition and losing market-share, UTI still remains a
formidable force to reckon with.

'
'

Free Press I&

Dhancom "UTI Nna 3577 Cmrn in QY,November I t , 1999
Fnt Press Jwnal, "Mutud Funds having pcat lime in Financial Ycar 1999-2000 with I I5
pr cmt W e r l y . Growth", August 7. 1999

The Indian mutual fund industry began with the formation of Unit Trust of
India (UTI) in 1963. The first mutual fund was Unit scheme '64, 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~nedto 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~onthe 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.

002583

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 funds are as safe as nat~onalisedbank
deposits. The boom continued into the nineties with the liberalisation evoking
positive response from the investors and acting as an add~tionalcatalyst 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

mobllised a record Rs. 14,000 crores

The industry experienced its first setback after the stock market crash of 1992.
The annual gross mobilisation of the mutual funds fell to Rs. 9,500 crores during the

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~lityof Securities Exchange Board of Ind~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~esand Exchange
Board of India, Act, 1991. Accordingly all the capital market act~vities,including 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, 1993 was 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 competit~on.W ~ t hthe opening up of the economy many publ~c
sector financ~alinst~tutionsestablished mutual funds in India . However, the mutual
funds industry remalned the exclusive doma~nof public sector in t h s period
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 Fleming MF entered the ~ndustry. Last six years
have been the most turbulent as well as exc~tingones for the industry. New players
have w m e in, while others have decided to close shop by either selling-off or merging

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 associated areas such as distributors, banktng, other saving products, registrars
and transfer agents, to name a few.
The decl~nein UTI's share of inflows is, to some extent, inevitable, as it was
for long a monopoly, or shared the market with banW institution-sponsored funds
whose performance was not encouraging. Even in 1994-97. the private sector funds
did not do well, and the UTI maintained ~ t market
s
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 UTI accounts 76 8 per cent banki~nst~tution-sponsored
funds10.68
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 of bankslinstitut~on-sponsoredfunds
declined 0.4 per cent during this period.

Table 33

b Under Management Private Sector Funds Show Cood Growth

(Rupees in Crores)
March 97 March 98 March 99 June 99 July 99

Fund Players

53,886

57,554

639

1,031

Unit Trust of lnd~a

'-

53,320 81,000 60,527 5 1

Private Sectw

Indian
I

Joint Ventures (lndlan)

1,093/

1,5831

1,016

1,512

1,398 39.9

3,0401

3,7321

4,504

07

13.6

22

i 83.6 (

Change Over Previous

%

5.3

87

Period.

Source: Credence, Mwnbai.

Of the total assets under management, open-ended funds accounted for

54.4 per cent and closeended funds for 45.6 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 became part of the mutual
h d scene with the entry of private sector funds in late 1993

Figure 3.4

Types of Funds and Scheme as on March 31,1999

Between new and existing schemes, the latter (open and close-ended)
accounted for 60 per cent to 89 per cent of the inflows in the various quarters of 199899 and 1999-2000. This also polnts to the market preference for open-ended funds.
Among the new schemes, the assured return ones accounted for a very large part of
the inflows.

Table 3.4

S a l a by Mutual funds Income Schema Still dominate 1998-99

83

4,809

8,762

Money Market funds

Total (Rs. Cr.)

4,075

6,093

5,021

From the Table 3.4, it 1s quite clear that the inflows into the private sector
funds and outflows has been from ~ncome-orientedand llquldimoney market mutual
funds. Further it shows that private sector funds accounted for a sizeable part of
redemption's repurchases in 1978-79 and in the first four months of 1999-2000. In the
asset base of Open-ended funds, income oriented funds account for 83.2 per cent,
equity oriented funds for 15.4 and balanced funds for 1.4 per cent. But assured return
schemes dominate the close-ended funds landscape, wth a share of 47 4 per cent.
Much of the equity-oriented funds is also in the close-ended category, with a share of
36.4 per cent (Figure 3.4).

The entry of foreign fund managers, setting up domestic AMC's,

Independently or in collaborations i equity partnersh~pswith Indian companies, also
brought about quality changes in the domestic mutual fund industry.

As seen From Table 3.5, the total resources mobil~sedby mutual funds during
1996-97 were lower at Rs.4,777 crore, compared to Rs. 6,508 crore In previous year
UTI remained the largest mobiliser of funds 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 was a sense of revival in the industry.
Table 3.5
Resources Mobilised by Mutual Funds

ivate Sector Mutual Funds

~tTrust of Ind~a(UTI)'

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, as well as to
fixed income schemes. As of March 31, 1997 the total corpus of all 231 schemes of
domestic mutual hnds including the schemes of LlTI but excluding redemptions I
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,

Rs.33.214 crore by 30 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 schemes available In
t h ~ scountry but the industry is still cons~deredto be In its Infancy stage. The
innovative measures of mobilising resources have to be viewed In 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~kelyto die a
natural death on account of better tax benefits of mutual funds over fixed deposlts
The Bonds & Debentures and Direct Equity options are 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 ease 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 industry has to mature to offering comprehensive life
cycle financial planning and not products alone. It means that 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

return appetite at these various stages. (Table 3.6 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 longterm needs of investors have been catered to launching liquid funds, income funds and
equity funds.The income funds are a better option over deposits, liquid funds are a
better option over current account deposits

Table 3.7
Sales Data for the Period April -June 1999

Source: RBI Website.

So far, there have been ~nnovationsin the structure such as openznd, closeend and interval mutual funds
At present, there are few new plans such as, 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~gherfrequency
of Dividends (catering to regular income via a tax free mode), Dlvldend Re~nveshnent
Plan (DRIP), Cheque-writing facility (via tie-up with banks), etc, which are more
service oriented or convenience oriented innovations.
Table 3.8
Net Assets of Open-ended and Close-ended Schemes
(December 1996)

Source: Unit Trust of India unpublished study. Bombay, 1996

As per the Data compiled by UTI regarding 190 schemes, havlng 588 lakh of
unitholders accounts and total net assets of RS. 69,435.5 crore gives an indication of
the assets of open-ended schemes accounted for 50.4 per cent of total assets while
close-ended funds accounted for 49.6 per cent. However, the high percentage of net
assets of open-ended schemes was due to the open-ended schemes of UTI. While
UTI accounted for 81.5 per cent of total assets, ~ t share
s
in open-ended schemes was
87 per cent. Even among open-ended schemes of UTI Unit 64, the performance of
open-ended schemes in terms of assets is not very signiticant. For example, let us
consider LIC Mutual Fund which as on 31 March 1996 had 22 schemes, out of which
four were open-ended and 18 close-ended schemes

Out of total assets of RS

1,782.35 crore only Rs. 169.48crore was under open-ended schemes, or 9.5 per cent
of the total assets.(Table 3.8)

The relatively low popularity of open-ended schemes In lnd~ahas k e n

revealed in the household Investors survey conducted by LC. Gupta (1993)
According to this survey only 21.3 per cent of sample households held open-ended
due to lock-in period, nonschemes. The reasons are held to be: lack of l~qu~dity
availability of information about NAV, and other difficulties related to repurchase.
On the management side, close-ended funds are easier to manage than open-ended
schemes, because of difficulties in cash management in the case of the latter.
However, it seems that perception towards open-ended schemes is slowly
changing. If the success of the new private sector funds IS any indication, it can be
assumed that investors are king attracted to open-ended funds. New funds like
Kothari Pioneer Prima, Biral Advantage, JM Balanced and Centurion Open-end have
Mobilised sizable resources from the market.

Table 3.9
Investible 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. I ,00,000 Crore under 11s management.
The industry is dominated by UTI,with its flagship US64 scheme. In the last 4 years,
resource mobilization by mutual funds has slowed considerably due to the adverse
stock market conditions.

Table 3.1 1
Schemewise Cumulative Resources M o b i l i by
Mutual Funds in India As on March 31f 000

Source : Probity Research 2000

The total mobilisation by all mutual funds went up to Rs. 75050.21 crore by
March 1995. Bu the year 1995-96 was a disappoinbng one, there was a drastic
reduction of total mobilisation (by all fmds and UTI) to Rs. 5976.3 crore and as a
result cumulative mob~lisationby 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 total Rs. 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, there has 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 product mix

But during 1999-2000 fiscal, due to the reduced interest rate scenario and the

taw 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~onalbasis, the mutual funds mobilised

Rs. 22710.73 crore without adjustment of repurchase 1 redemption during the

financial year 1998-99. However, it is important to note that in case of open-ended

schemes, there was a continuos sale and repurchase by mutual funds, and there was
redemption 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.949.67 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. Deta~lsare glven in the Table 3.13
Table 3.13

Net-inflow of Funds of Different Segments as on March 1999

Source: SEBl
CUMULATIVE POSITION OF NET ASSETS OF MllTUAL FUNDS

The Net Assets of all mutual funds aggregated at Rs. 90,685.25 crores as on
November 30, 1999. It would be 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 sector funds (Table 3.13) with 19 per cent and public sector settles at 10
per cent.

Table 3.14
Total Asseb of Mutual Funds as on November 30,1999
Fund Particulars

Ra (Crores)

Percentage (%)

64637.37
Private Sector
Public Sector
Total

17041.34
9006.54
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~aand
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 the funds mobilisation was
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 got plcked up and reached a gross amount of

Rs 29,858.38 crores during the first eight months of the current tinancial year 19992000 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. 1 1130.50 crores
during the penod under review (Apnl-Nov 1999) as against a net outtlow of Rs.
949.67 crores during the entire financial year 1998-99.

Table 3.15
Fund Mobilktion - 31 December, 1999
(Rupees in Crores)

foreign
Told (W(ll)+(Ill)
2

GnndTotal

478300

478300

399600

78700

1950(1

7100

551200

558.300

519600

38700

97000

A+B+C+D

Note : I. Assets under management of UTI at book value

2. Data is provisional and subject to revision

3. Figure rounded denote number of funds.

Source : Robity Research 2000

Table 3.16
Sectorwise funds Mobilhtion By Mutual funds
(Rupees in Crores)

1994-95

7655

5763

13418

86110

99528

13218

112744

1995-96

113 3

234 8

348 1

-6314 0

-5965 9

133 0

-5832 9

1996-97

62

1806

1868

-3045063

-28562

8749

-1981 3

1997-98

251 8

276 6

528 5

2119 O@

2647 5

658 0

330544

@ Data excludes re-lnvesment sales of Rs 174 0 crore

Notes 1 Data for UTI are Gross Value (\nth prcm~um)of net sales and for other Mutual
funds, figures present net sales under all on-gomg schemes
2 Data excludes amounts mobil~sd by off-shore h d s and through roll-over

schemes
Source. UTI and respective Mutual funds
Reports on Trend and progress of Banking in India - RBI publication

An analysis of the data released by SEBI shows that private Sector funds have
grabbed a lion's share of the incremental busmess in the Mutual funds Industry.
During Nov-Dec 1999, the met assets under management of all mutual funds have
grown by nearly by 115588 crore to Rs. 97000 crore as on December 31,1999,
compared to Rs. 85442 crore as on October 3 1,1999
Private sector funds mobilised Rs 19157 crore in eight months with closeended funds accounting for a minuscule Rs. 51 crores UTI had a gross mobilisation
of Rs. 9146 crores. The share of private sector funds in the net assets has gone up by

2 per m t from 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 AND OPERATIONAL 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 the 35 registered mutual funds only 24
were operational, out of whlch 10 were publ~csector 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 to Rs.81,026.52 crores.

Table 3.17
Growth of Mutual Fund Industry (March 1990 to March 1996)

Note @ estunated
Source SEBI,State of Capital Markets 1989-90and Annual Report 1995-96

As on March 31,1996, the estimated number of investor population was 588

lakh out of which about 480 lakh (81.63 per cent) were with UTI, 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 mutual funds. It is seen that individual investors accounting 61 per cent of all
mutual fund investors dominated the industry. This was followed by the corporations
(27 per cent), trusts (4 per cent) and 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

Rs 1,02,529.52 crore in (1997-98). The Institution-wise distribution of resource

mobilisation (upto March 1998) ind~catesthat UTI mobilised 84 per 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.

Table 3.18
Gross Cumulative Resources Mobilised by Indian Mutual Funds (198&98)
(Rupees in Crores)
Up to
(I)
198687

UTI

(2)

Public
Sector MF
(3)

Private
Sector MF
(4)

Tol8l
(W4)

(5)

(6)
4.563 68

1,621 00

1.621 00

13,455 65

4,563 68

1987-88

6,738 81

1988-89

11.834 65

Total
(t+-4)

6,738 81

1989-90

17,650 82

1.460 00

1,46000

19,11065

19'32-91

21.37648

1.683 97

1,683 97

23.060 45

1991-92

31,805 69

5,674 51

5,674 51

37.480 20

1992-93

38,976 81

8,011.2I

8,011 21

46.988 02

1993-94

51.978 00

8,407 21

916 00

9,323 21

61.301 21

1994-95

61.500.00

10,550 21

3,000 00

13.550 21

75,050 21

1995-96

67,492 00

10.451 40

3.083 I ?

13,534.52

81,026 52

19%-97

77,92 W

10,602 21

3,429 12

14031 52

91123 52

1997-98

86,192 00

10.934 40

5.403 I ?

16,337 52

102529 52

Note Outtlow of funds IS not incorporared

Source: SEBI: Mutual Funds 2000 Report and Annual Rcpon 1995-%.

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
technology, pharmaceut~cals,and (FMCG) Fast movlng
sectors such as ~nformat~on
consumer goods. Dedicated Gilt funds with 100 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, all

income from UTI and other mutual funds received in the hands of the investors were

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) was 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~onedbelow. 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 7 per cent) garnered 40.97 per cent of the total

funds. Although the growth schemes entered the market relatively later, they made
good progress. Up to March 1996, 55 (27.92 per cent) growth schemes had mobil~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
IS entitled

for tax 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 for keep~ngin view the macro-economic development and

GDP growth in the country