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History of Mutual Funds

History of Mutual Funds - Origin, First MF, and Current Scenario

India has become the fifth-largest economy in the world and plans to become the 2nd largest by 2075 (Source - Goldman Sachs research report). For this journey, from the 5th to the 2nd, India needs strong financial backing and investor support. The mutual fund industry will also play an important role in this transformation. Equity mutual funds provide investors with an opportunity to build wealth with a reasonable level of risk. Let’s look at how mutual funds have evolved to become a significant investment avenue in investor portfolios.

Mutual Fund Origin

Mutual funds have a long and rich history dating back to the 1800s when the first investment trust was established in London. However, the world didn’t see the first mutual fund until 6 decades later. In 1924, the first-ever official mutual fund - the Massachusetts Investors Trust (MIT), was launched in the USA and opened to investors in 1928 (Source - Investopedia).

The decade from the 1950s to 1960s saw some funds come in; however, the growth was slow during that phase. The roaring '80s and '90s saw explosive growth all over the world, with a few exceptions. Once mutual funds gained momentum, the AUM of mutual funds in the USA grew from $5.53 lakh crore in 1998 to $22.11 lakh crore in 2022 (Source - Statista).

In 2021, the world average AUM to GDP ratio was 75%, with the USA being a major outlier with a ratio of 140% (World Bank, 2021)! Mutual funds have now become one of the most prevalent investment avenues in investor portfolios.

History of Mutual Funds in India

The mutual fund industry sowed its seeds in India in the year 1963 and has grown dramatically since then, especially in the last 2 decades. Let’s understand the history of mutual funds in 5 phases.

Phase 1 - 1964-1987

The formation of the Unit Trust of India by the government, functioning under the regulatory and administrative purview of the Reserve Bank of India (RBI), gave birth to the mutual fund industry in India. This gave rise to the first-ever mutual fund scheme, Unit Scheme 1964 (US ‘64), marking UTIs entry into the mutual fund industry. In 1978, UTI broke ties with RBI, and the Industrial Development Bank of India (IDBI) assumed regulatory control.

Phase 2 - Entry of Public Sector MFs (1987-1993)

In 1987, a significant milestone was achieved as public sector mutual funds made their debut, spearheaded by Public Sector banks, Life Insurance Corporation (LIC), and General Insurance Corporation (GIC). In the same year, SBI mutual fund was established and became the first ever ‘Non-UTI’ mutual fund. Subsequently, LIC and GIC also set up their mutual funds in June 1989 and December 1990, respectively. By the end of 1993, the mutual fund AUM had grown to a whopping Rs 47,004 crore (Source - AMFI).

Phase 3 - Entry of Private Sector MFs (1993-2003)

The mutual fund industry underwent a paradigm shift when SEBI was established in April 1992, marking a pivotal moment in safeguarding investor interests and overseeing the growth and regulation of the securities market. 1993 became the first year where SEBI regulations came into force for all mutual funds except for UTI. With the entry of private sector funds began a new era of mutual funds, one which was accessible to a larger set of investors. More and more foreign sponsors could now set up mutual funds in India. By the end of January 2003, the mutual fund AUM crossed Rs 1.22 lakh crore (Source - AMFI).

Phase 4 - February 2003 - April 2014

In February 2003, following the revoking of UTI, it was separated into the Specified undertaking of UTI (SUUTI) and UTI Mutual Fund. This restructuring of UTI, along with mergers of different private-sector mutual funds, marked the fourth phase of the mutual fund industry. This phase also witnessed the aftermath of the housing bubble. Moreover, the elimination of the entry load further heightened the challenges faced by the mutual fund industry, prompting it to undergo comprehensive restructuring in the next 2 years. Consequently, the growth of the industry was slow from 2010 to 2013 (Source - AMFI).

Phase 5 - Current Scenario (May 2014 - present)

Following the global meltdown caused in phase 4, SEBI introduced progressive restructuring measures in September 2012 to revive the growth of the industry. The mutual fund AUM surpassed Rs 10 lakh crore for the first time in May 2014 and Rs 20 lakh crore in August 2017. As of 31st January 2024, the mutual fund industry AUM stands at Rs 52.74 lakh crore, a 6-fold growth in the last 10 years. The number of folios crossed a milestone of 10 crore in May 2021, and as of 31st January 2024 stands at 16.96 crore (Source - AMFI).

The increasing awareness of mutual funds, regulatory framework, and mutual fund distributors have played a pivotal role in achieving this. The ease, convenience, and low entry barriers (as low as Rs 100!) in mutual funds through SIP have made investing accessible to a wider audience. SIP accounts crossed the milestone of 1 crore in April 2016, and as of 31 January 2024, the number of SIP accounts is at 7.92 crore. Furthermore, the mutual fund industry is expected to cross an AUM of Rs 100 lakh crore and onboard 10 crore investors in the next decade (Source - AMFI).

India’s AUM to GDP ratio stands at a mere 17% (Source - AMFI & World Bank), indicating the industry is still at a nascent stage and has a long way to go before becoming a mature and developed industry. Mutual fund distributors have acted as a catalyst for growth and will continue to remain at the heart of the industry. As this industry navigates its evolution, the collaborative efforts of regulators, fund houses, and distributors will play a pivotal role in shaping a robust and investor-friendly environment.