The Evolution and History of Mutual Funds in India

Mutual funds are one of the most popular investment schemes in this era, with youths ditching the low returns from fixed deposits and investing a chunk of their income into these investment vehicles.

However, mutual funds in India were not always the most prevalent investment option. In fact, they were introduced in the Indian market as late as 1963! So, how did they become one of the most popular investment instruments in the country? What was the history behind it?

The answer to all these questions is in this article, so read on.

History of mutual funds

The concept of mutual funds was first started in the Netherlands in the 18th Century by a Dutch businessman named Adriaan Van Ketwich. The trust was named “Eendragt Makt Magt”, which means “Unity creates strength”.

The United Trust of India (UTI), formed in 1963 by the Government of India and the RBI, was the first mutual fund in India. The primary goal of this initiative was to encourage the general masses to participate in investment practices like equity investment and mutual funds.   

The history and evolution of mutual funds in India are divided into five phases:

Phase 1 (1963-87): Initial phase

The initial phase of 24 years witnessed many key events and changes.

#1. UTI was introduced in India in 1963 as an Act of the parliament, with RBI as its regulatory body.

#2. UTI released its first-ever investment scheme, the Unit Scheme 1964 (US-64). It became one of its flagship schemes and gathered immense popularity amongst the masses.

#3. In 1978, RBI was de-linked from UTI, and the Industrial Development Bank of India (IDBI) became its regulatory body.

#4. Open-ended growth funds were first introduced post-IDBI’s rise as UTI’s regulatory body. By the end of 1988, UTI’s total assets under management (AUM) stood at Rs. 6,700 Cr.

Phase 2 (1987-93): Entry of the public sector

Until 1987, UTI held a monopoly in the Indian mutual fund industry. However, the second phase saw the emergence of several public sector players.

#1. In 1987, the government allowed banks and other public sector financial institutions to establish mutual funds.

#2. SBI became the first-ever public sector bank to launch its mutual fund in June 1987. This was closely followed by Canara Bank’s ‘Canara Bank Mutual Fund’ in December of the same year.

#3. Soon after, other banks like Punjab National Bank, Bank of Baroda, and Indian Bank launched their mutual fund schemes, ending UTI’s monopoly.

Phase 3 (1993-03): Entry of private sector

While the second phase was a turning point for the public sector, phase 3 was about the private sector’s growth.

#1. As the government made amends to liberalise the Indian economy between 1991-96, the private sector was also given the green signal into the mutual fund industry in 1993. Several private players joined the industry, including ICICI Mutual Fund and Morgan Stanley Mutual Fund.

#2. In 1992, the government granted statutory powers to the Securities and Exchange Board of India (SEBI) to protect the interest of investors in the financial markets. By 1993, SEBI was appointed as the regulatory body of all AMCs.

#3.  In 1996, SEBI introduced new rules and regulations for mutual fund houses.

#4. By 2003, India had 33 mutual funds, with a total AUM of Rs. 1,21,805 Cr.

Phase 4 (2003- 2014): Consolidation and growth

The fourth phase brings us up close to the current scenario with the most splits and mergers in the mutual fund industry.

#1. In February 2003, the government abolished the Unit Trust of India Act. UTI was split into two organisations: Specified Unit Trust of India and UTI mutual funds.

#2. The Specified Unit Trust of India doesn’t fall under mutual funds regulations authority. It operates under the administration and regulations set by the government.

#3. The UTI Mutual Funds became a SEBI-registered mutual fund house and worked under regulations set by SEBI. SBI, LIC, PNB, and BOB sponsored UTI Mutual Funds.

#5. This period also saw significant acquisitions, with Principal Mutual Funds acquiring PNB Mutual Funds and Birla Sun Life taking over Alliance Mutual Funds.

#6. The Indian mutual fund industry had an AUM of over Rs. 10 Lakh Crore in May 2014.

Phase 5 (2014 - Present): Current scenario

The Indian mutual fund industry has recorded tremendous growth over the last ten years.

#1. The average AUM rose from Rs. 10 trillion in 2014 to Rs. 41.5 trillion in 2023.

#2. The Covid-19 pandemic further boosted retail investors’ participation, with 3.4 million new demat account openings in the September quarter of 2020.

#3. Currently, there are 44 asset management companies in India, of which 35 belong to the private sector.

Future of the Indian mutual fund industry

While mutual funds’ history did not witness spontaneous growth in India, the future is bright for these investment vehicles. With SEBI’s continuous measures to promote mutual funds and increasing investor awareness, the industry is poised for substantial growth.

Moreover, there is also a rise in digital platforms for mutual fund investments, making it easier for investors to explore different options and carry out transactions conveniently. They help investors access a wide range of tools and resources to make informed decisions. This has further encouraged them to embrace mutual funds in their financial planning.

In a nutshell

While mutual funds started as a government initiative with a monopoly in the market, they soon evolved into a vast business. However, the motive behind the industry is still intact- to attract the general mass of India to invest in the Indian stock markets.

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