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',CI-
,
Renew,
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
oN- load 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
h
Institutions Exchange Board

Investment Sectoral
I Financial 1
Institutions
Institutions
TFCI
NABARD
SIDCs

1i Stock Exchange
Merchant Bankers
Underwriters
Stock Broken
Retail Investors
1
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 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), 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.

-
I 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 128600 603500 1165400 1174300 1707900 2573300

deposits (3 10) (2 20) (7 50) (10601 (840) (1370) (1680)
L~felnsuram 915.00 5599.00 7114.00 9548 00 1134400 13481 00 12623 00
funds (7 0) (9.50) (8.80) (870) (8 10) (10 80) (8 30)
Prov~denland 2122 00 11155 00 14817.00 18248 00 2061900 25438 00 27442 00
Penslonfunds 11750) 11890) H840) 11670) 11480) 12040) (1790)
L I I I I 1 I I
Clams on 71200 794200 394900 678400 1322200 1087300 1198700
Government (590) (13 50) (4 90) (6 20) (9 50) (8 70) (7 80)

I
Shams and
Debentures 1 41200 497200 821200 1006700 846100 588000 600300
(84011 (10201/ (921/ (6 rod (4 7001 (390i
3100 343800 561200 470500 390800 26200 30200
Un~tsof uTI
(0 30) (580) (7 00) (4 3) (2 80) (020) (020)
37300 45300 -139800 -119000 -160000 3W00 266700
Trade Debts
(3 10) (48) (1 70) (1 1) (1 1) (020) (1 70)
-
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

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 Corporate Saor

Sector Saror

New lwes
Rieht Issues
Debentures Dsbentures
lnnitutional
Units of U T M 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

I 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
Index PIE R ~ I O
, lM1ator8 U I x N U Snmx N u -rmw
(Rs Cr)
c'W$yry 1
t1992 t

I Aprll 382475 185581 4643 345 206364868

December / 3949 78 1 1876 13
I
1 4645 / 38 58 1 /
423 4,oO 000 1

I 1996
April / 3598 66 ' 1649 6 / 19 57 20 14 1 1
371 6 36 868
Demmbr/ 2918681 1290211 122 11781 3861477,425
hide @ ESIIMI~for dl-lnd~a

Nua (Bue 1983-84 IM))

Source Govmrnent of Ind~a.
-
Saucx (Base 1978-79 = I W)

Mlnlstry ofF~nance.Econom~cSurvey, 1993-94.1994-95. 1995-%

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

most dominant In the savlngs market but ~ t role

s 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 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 Hold Un~tholdersFund in

Twta -* MF Enlure Complimce to
SEBI Enter into Agreement
\
Appointed by -L
Baord of
Trustee Hold Unitholders Fund in
MF Ensure Compliance to
SEBI Enter into AgT~mCnt
Appointed by HWith SEBI
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 Ilu
Dcvclopmenc of Mutud Fund lndurtry Ropoxd". November. 1999. Dh.n.com Money line
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

provides for disclosure of full portfolio in the balance sheet and the a ~ u a repon
l sent

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 1991-
92". 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

'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
(4.1 -
I innlhiF
,-c 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
h -
b Under Management Private Sector Funds Show Cood Growth
(Rupees in Crores)
Fund Players March 97 March 98 March 99 June 99 July 99
I , I I I I '-

Unit Trust of lnd~a 53,886 57,554 53,320 81,000 60,527 5 1

Private Sectw

Indian 639 1,031 1,016 1,512 1,398 39.9

Joint Ventures (lndlan)

I
1 1,093/
I
1,5831 3,0401
I I
3,7321 4,504 i 83.6 (

Change Over Previous

% 5.3 07 13.6 22 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 1998-

99 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

Money Market funds - 83

Total (Rs. Cr.) 4,075 6,093 5,021 4,809 8,762

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 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, liquid funds are a

better option over current account deposits

 Table 3.7
Sales Data for the Period April -June 1999

I I I I I
Source: RBI Website.

So far, there have been ~nnovationsin the structure such as openznd, close-

end 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

schemes. The reasons are held to be: lack of l~qu~dity

due to lock-in period, non-

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 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~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 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. 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) - 478300 478300 399600 78700 1950(1
GnndTotal 2 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 close-

ended 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 UTI Public Private Tol8l Total
Sector MF Sector MF (W4) (t+-4)
(I) (2) (3) (4) (5) (6)
198687 4,563 68 4.563 68
1987-88 6,738 81 6,738 81
1988-89 11.834 65 1,621 00 1.621 00 13,455 65
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