Dr. Arun Draviam
LLB, FCS, MBA, PhD.
A mutual fund is formed when a group of individuals come together to pool money, which is then invested. The word “mutual” signifies that the benefits of investment accrue pro rata to all the investors. A Mutual Fund is a trust that pools savings of a no. of investors (with small surplus) who share a common financial goal.
The investors join particular MF scheme with defined objective which suits them. Money is invested by AMC in different types of securities- from shares to debentures to money market instruments, depending upon scheme’s objectives. MF is suitable for the common man as it offers opportunities to invest in a diversified/ professionally managed portfolio at a relatively low cost.
MF is the ideal investment vehicle. Markets for equity , bonds and other fixed income instruments, real estate, derivative and other assets have become mature and knowledge driven. Price changes in these assets are driven by global events. An individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand implications and act speedily.
A MF appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund exploits economies of scale in 3 areas–research, investing, transaction processing.
While the concept of individuals coming together to invest money collectively is not new, the MF in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity after the 2nd World War. Globally, there are thousands of firms offering tens of thousands of MF with different investment objectives.
Evolution of the MF industry
The MF industry has had a 45 years history in India. The ride through these years has not been smooth. UTI was up under an Act of the Parliament and the first scheme US 64 became operational from July 1964. The impetus for establishing a statutory trust came from the desire to increase the propensity of middle/lower groups to save. After the 1962 Indo-China war and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter the capital market. The UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust.
The industry was a one-entity show till 1986 when UTI monopoly was broken as SBI and Canara Bank MF entered the arena. This was followed by the entry of other MF sponsored BOI, LIC, and GIC. Starting with an asset base of Rs. 0.25bn in 1964 the industry has grown at a CAGR of 26.34% to its current size of Rs. 1130bn.
The period 1986-1993 was the period of public sector mutual funds. From one player in 1985 the number increased to 8 in 1993. The opening up of the asset mgmt. business to private sector in 1993 saw global players like Morgan Stanley, Jardine Fleming, Allianz Capital along with host of domestic players joined the fray. For equity funds, 1994-96 was the worst in history of MFs.
1999-2000-Year of MF
1999-00 saw immense growth/ developments in the MF sector. It marked the resurgence of MF and regaining of investor confidence. One of the most significant factors that gave lift to the revival of the funds was the Union Budget brought about a large number of changes in one stroke. Budget exempted MF income distributed by equity-oriented schemes from tax, both at the hands of the investor as well as the mutual fund end.
It provided centre stage to the MF, made them more attractive and provided acceptability. So new schemes were inevitable. The quest to attract investors extended beyond just new schemes. The funds started to regulate themselves and went all out on winning the trust and confidence of the...