Introduction to the Mutual Fund Industry

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Mutual Fund Industry


A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. The income earned through these investments and the capital appreciations realized 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.

Mutual funds are financial intermediaries, which collect the savings of investors and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies.

Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market. Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary, which undertakes informed investment decisions and provides consequential benefits of professional expertise. The raison d’être of mutual funds is their ability to bring down the transaction costs. The advantages for the investors are reduction in risk, expert professional management, diversified portfolios, and liquidity of investment and tax benefits.

By pooling their assets through mutual funds, investors achieve economies of scale. The advantage that such a investing logic offers to an individual investor is the advantage of scale. A collected corpus can be used to procure a diversified portfolio, indicating greater returns as also create economies of scale through cost reduction. This principle has been effective world-wide as more and more investors are going the mutual fund way. This portfolio diversification ensures risk minimization. The criticality of such a measure comes in when you factor in the fluctuations that characterize stock markets. The interests of the investors are protected by the SEBI, which acts as a watchdog. Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 1993.


The mutual fund industry in India began with the setting up of the Unit Trust In India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs.24,464 Crores as of March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC established mutual funds. Securities Exchange Board

of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. Mutual funds have been a significant source of investment in both government and corporate securities. It has been for decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks--- mainly state-owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies is permitted on a case by case basis. UTI, the largest mutual fund in the country was set up by the government in...
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