India has been the fastest growing markets for mutual fund industry. With progressive liberalization of economic policies, there has been rapid growth of capital market, money market and financial services Industry including merchant banking, leasing and venture capital (Tripathy, 1996). The increasing globalization of financial groups, rapid spread of multinationals and strong excellent performance of equity and bond markets in India has led to the evolution of mutual funds. Now it has evolved from a single player monopoly in 1964 to a fast growing market. To the date assets under management of 38 mutual funds stood at Rs. 7, 47,524.58 crore. Increasing number of mutual funds in the developed financial markets indicate investor’s preference for the mode of investment (Huhmann, 2005, Talat AFZA and Ali Rauf, 2006). Mutual funds deploy their funds in marketable instruments. So well developed securities market is pre-requisite for the successful operations of mutual funds.
Origin and Legal Framework of Mutual Funds in India The concept of mutual funds evolved in India in July 1964, when at the initiative of the government of India and the Reserve Bank of India, Unit Trust of India was set up to mobilise the savings of the middle class investors and to invest those funds in the capital market for the much needed industrial growth. As only 1/3 of household savings were at the disposal of the corporate sector, UTI was established to channelize large shares of household savings to productive investment in the corporate sector. Regulatory framework of Indian mutual funds industry matches with the most developed markets of the world. Securities and Exchange Board of India has been introducing several regulatory measures on wide range of issues including the financial capability of players to ensure resilience and sustainability through increase in minimum net worth and capital adequacy, investor protection and education through disclosure norms for more information to investors (KPMG).
We can put mutual fund industry into following four phases
First Phase (1964-1987): The first phase was between 1964 and 1987 when Unit Trust of India (UTI), the only player, was set up in 1963 at the initiative of government of India and the Reserve Bank of India (RBI) under the act of parliament. Since it was set up by the Reserve Bank of India, it functioned under the regulatory and administrative control of the Reserve Bank of India. Later the Industrial Development Bank of India (IDBI) took over its control and it was delinked from the Reserve Bank of India in 1978. At the end of 1988 its total assets under management were Rs.6, 700 crores. Second Phase (1987-1993): During second phase public sector entered the Industry. Total of eight funds were established, six by banks and one each by LIC and GIC. State bank of India was the first to set up its mutual fund followed by Canra Bank mutual fund in December 1987, Punjab National Bank mutual fund in august 1989, Indian bank mutual fund in November 1989, Bank of India mutual fund in June 1990 and Bank of Baroda mutual fund in October 1992. The total asset under management had grown to 61,028 crore at the end of 1994. Total number of schemes offered by mutual funds during this period was 167.
Third Phase (1993-2003): During this phase private and foreign sectors mutual funds entered the industry. The Kothari Pioneer was the first private mutual fund to be established. For the first time SEBI came out with comprehensive regulations in 1993 which were revised in 1996. The industry now...