HISTORY OF THE INDIAN MUTUAL FUND

INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The history
of mutual funds in India can be broadly divided into four distinct phases.

First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under
management.

Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of
non- UTI, public sector mutual funds set up by public sector banks and Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI
Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian
Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct
92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in
December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private
sector funds in 1993, a new era started in the Indian mutual fund industry, giving the
Indian investors a wider choice of fund families. Also, 1993 was the year in which the
first Mutual Fund Regulations came into being, under which all mutual funds, except UTI
were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit
Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with assets under management of
Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64
scheme, assured return and certain other schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund
Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. The graph indicates the growth of assets over the years.
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of
the Unit Trust of India effective from February 2003. The Assets under management of
the Specified Undertaking of the Unit Trust of India has therefore been excluded from the
total assets of the industry as a whole from February 2003 onwards.
CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realised are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the organisational set
up of a mutual fund:
TYPES OF MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial
position, risk tolerance and return expectations etc. The table below gives an overview
into the existing types of schemes in the Industry.
The Regulatory Body for Mutual Funds

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds
mentioned above. All the mutual funds must get registered with SEBI. The only
exception is the UTI, since it is a corporation formed under a separate Act of Parliament.

The broad guidelines issued for a MF

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines
pertaining to mutual funds:

• MFs should be formed as a Trust under Indian Trust Act and should be operated
by Asset Management Companies (AMCs).
• MFs need to set up a Board of Trustees and Trustee Companies. They should also
have their Board of Directors.
• The net worth of the AMCs should be at least Rs.5 crore.
• AMCs and Trustees of a MF should be two separate and distinct legal entities.
• The AMC or any of its companies cannot act as managers for any other fund.
• AMCs have to get the approval of SEBI for its Articles and Memorandum of
Association.
• All MF schemes should be registered with SEBI.
• MFs should distribute minimum of 90% of their profits among the investors.

There are other guidelines also that govern investment strategy, disclosure norms and
advertising code for mutual funds.

Why should I choose to invest in a mutual fund?

For retail investor who does not have the time and expertise to analyze and invest in
stocks and bonds, mutual funds offer a viable investment alternative. This is because :

• Mutual Funds provide the benefit of cheap access to expensive stocks

• Mutual funds diversify the risk of the investor by investing in a basket of assets
 • A team of professional fund managers manages them with in-depth research
inputs from investment analysts.

Being institutions with good bargaining power in markets, mutual funds have access to
crucial corporate information which individual investors cannot access.

Mutual funds and its risks

Financial theory states that an investor can reduce his total risk by holding a portfolio of
assets instead of only one asset. This is because by holding all your money in just one
asset, the entire fortunes of your portfolio depend on this one asset. By creating a
portfolio of a variety of assets, this risk is substantially reduced.

Mutual fund investments are not totally risk free. In fact, investing in mutual funds
contains the same risk as investing in the markets, the only difference being that due to
professional management of funds.

A very important risk involved in mutual fund investments is the market risk. When the
market is in doldrums, most of the equity funds will also experience a downturn.
However, the company specific risks are largely eliminated due to professional fund
management.

How can one invest money in Mutual Funds?

One can invest by approaching a registered broker of Mutual funds or the respective
offices of the Mutual funds in that particular town/city. An application form has to be
filled up giving all the particulars along with the cheque or Demand Draft for the amount
to be invested. Nowadays, funds are also offering the facility of direct debit from the
bank account.

What are the parameters on which a Mutual Fund scheme should be

evaluated?

Performance indicators like total returns given by the fund on different schemes, the
returns on competing funds, the objective of the fund and the promoters' image are some
of the key factors to be considered while taking an investment decision regarding mutual
funds.
As a lay investor, how can one go about analyzing the mutual fund
scheme?

As a service to the investing community, Karvy does it for you. Our research team
evaluates each scheme based on primary as well as secondary information and presents
an unbiased report which will help you to take a decision on whether a fund is worth
investing or not.

The different types of plans that any mutual fund scheme offers

That depends on the strategy of the concerned scheme. But generally there are 3 broad
categories. A dividend plan entails a regular payment of dividend to the investors. A
reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A
growth plan is one where no dividends are declared and the investor only gains through
capital appreciation in the NAV of the fund.

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few income distributions, if any, are made. The investor thus only
realises capital appreciation on the investment. This plan appeals to investors in the high
income bracket. Under the dividend plan, income is distributed from time to time. This
plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income
distribution. This is referred to as the dividend reinvestment plan. Under this plan,
dividends declared by a fund are reinvested on behalf of the investor, thus increasing the
number of units held by the investors.
Automatic Investment Plan
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan
(SIP), the investor is given the option for investing in a specified frequency of months in
a specified scheme of the Mutual Fund for a constant sum of investment. AIP allows the
investors to plan their savings through a structured regular monthly savings program.
Automatic Withdrawal Plan
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan
(SWP), a facility is provided to the investor to withdraw a pre-determined amount from
his fund at a pre-determined interval.

Which plan should one choose?

It depends on your investment object, which again depends on your income, age,
financial responsibilities, risk taking capacity and tax status. For example a retired
government employee is most likely to opt for monthly income plan while a high-income
youngster is most likely to opt for growth plan.

Is there any difference between investing in a mutual fund and in an

initial public offering (IPO) of a company?

Yes, there is a difference. IPOs of companies may open at lower or higher price than the
issue price depending on market sentiment and perception of investors. However, in the
case of mutual funds, the par value of the units may not rise or fall immediately after
allotment. A mutual fund scheme takes some time to make investment in securities. NAV
of the scheme depends on the value of securities in which the funds have been deployed.

What is the difference between mutual funds and portfolio management

schemes?

While the concept remains the same of collecting money from investors, pooling them
and investing the funds, the focus is different. While mutual funds invest the money
according to their investment objectives, portfolio management services are investor
centric in the sense that they are tailor-made to suit investment needs of investors,
guiding through various investment options and offering advisory services.

The major rights as a unit holder in a mutual fund

Some important rights are mentioned below:

• Unit holders have a proportionate right in the beneficial ownership of the assets of
the scheme and to the dividend declared.
• They are entitled to receive dividend warrants within 42 days of the date of
declaration of the dividend.
• They are entitled to receive redemption cheques within 10 working days from the
date of redemption.
• 75% of the unit holders with the prior approval of SEBI can terminate AMC of
the fund.
 • 75% of the unit holders can pass a resolution to wind-up the scheme.

Advantages of mutual funds.

Mutual funds have advantages compared to direct investing in individual securities.

These include:

• Increased diversification
• Daily liquidity
• Professional investment management
• Ability to participate in investments that may be available only to larger investors
• Service and convenience
• Government oversight
• Ease of comparisonDisadvantages of mutual funds

Mutual funds have disadvantages as well, which include:

• Fees
• Less control over timing of recognition of gains
• Less predictable income
• No opportunity to customize

Total number of mutual fumds that are available till date are:

1 AEGON Mutual Fund

2 AIG Global Investment Group Mutual Fund
3 Axis Mutual Fund
4 Baroda Pioneer Mutual Fund
5 Benchmark Mutual Fund
6 Bharti AXA Mutual Fund
7 Birla Sun Life Mutual Fund
8 BNP Paribas Mutual Fund
9 Canara Robeco Mutual Fund
1
Daiwa Mutual Fund
0
1
Deutsche Mutual Fund
1
1
DSP BlackRock Mutual Fund
2
1
Edelweiss Mutual Fund
3
1
Escorts Mutual Fund
4
1
Fidelity Mutual Fund
5
1
Franklin Templeton Mutual Fund
6
1
Goldman Sachs Mutual Fund
7
1
HDFC Mutual Fund
8
1
HSBC Mutual Fund
9
2
ICICI Prudential Mutual Fund
0
2
IDBI Mutual Fund
1
2
IDFC Mutual Fund
2
2
ING Mutual Fund
3
2
JM Financial Mutual Fund
4
2
JPMorgan Mutual Fund
5
2
Kotak Mahindra Mutual Fund
6
2
L&T Mutual Fund
7
2
LIC NOMURA Mutual Fund
8
2
Mirae Asset Mutual Fund
9
3
Morgan Stanley Mutual Fund
0
3
Motilal Oswal Mutual Fund
1
3
Peerless Mutual Fund
2
3
Pramerica Mutual Fund
3
3
PRINCIPAL Mutual Fund
4
3
Quantum Mutual Fund
5
3
Reliance Mutual Fund
6
3
Religare Mutual Fund
7
3
Sahara Mutual Fund
8
3
SBI Mutual Fund
9
4
Sundaram Mutual Fund
0
4
Tata Mutual Fund
1
4
Taurus Mutual Fund
2
4
UTI Mutual Fund
3