ABSTRACT

The Indian mutual fund industry has come a long way since its inception in 1963. The industry witnessed sufficient growth on all parameters - the number of fund houses, the number of schemes, funds mobilized, assets under management, etc. Given the critical

role of channeling household savings, the question is - has the Indian mutual industry succeeded in achieving its’ goal? This study addresses this concern. The detailed nature

of the current study suggests that the mutual fund industry has recorded significant progress on all fronts yet it has not been able to utilize its potential fully. On almost on all parameters, it is far behind the developed economies and even most of the emerging economies of the world. Moreover, the industry faces a number of challenges like low penetration ratio, lack of product differentiation, lack of investor awareness and ability to communicate value to customers, lack of interest of retail investors towards mutual funds and evolving nature of the industry. Based on the analysis the study suggests some recommendation to address these challenges

Key Words:

Mutual Funds, Assets under Management, House Hold Savings, Risk, Returns, Investors

INTRODUCTION

With the increasing emphasis in domestic savings and their mobilization and allocation towards profitable investments, the need and scope of mutual fund operations has increased. The mutual funds is one of the important classes of financial intermediaries which enables millions of small and large savers spread across the country as well as internationally to participate in and derive the benefits of the capital market growth. It is an alternative vehicle of intermediation between the suppliers and users of investable financial resources which is becoming increasingly popular in India and aboard due to higher investor return and relativity low risk and cost. Thus the involvement of mutual funds in the transformation of Indian economy has made it urgent to view their services not only as financial intermediary but also as pace settlers as they are playing role in mobilizing and efficient allocation of investable funds through markets. The fact is that the mutual funds have a lot of potential to grow but to capitalize the potential fully, it would need to create and market innovative products and frame distinct marketing strategies. Moreover, the equity culture has not yet developed fully in the country as such, investor education would be equally important for greater penetration of mutual funds.

The history of mutual funds dates back to 19^th century with its origin to Great Britain. Robert Fileming set-up in 1868 the first investment trust under the title ‘Foreign and Colonial Investment Trust’ to manage the finances of moneyed classes of Scotland by

spreading the investment and other investment trusts which were subsequently set-up in Britain and the US, resembled today’s close-ended mutual fund schemes. The first mutual

fund in the US namely, Massachusetts Investors’ Trusts, was set up in 1924. In India, the

mutual fund industry started in 1963, however, its history has been divided into four phases.

Phase I (1964-87)

This phase started with setting up of Unit Trust of India (UTI), the first mutual fund set up in the public sector under the UTI Act 1963, which launched its first unit scheme in 1964 namely US-64 with a major objective of mobilizing savings through the sale of units and investing them in corporate securities for maximizing yields and capital appreciation.

It was the first open ended scheme and the most popular scheme in the history of mutual funds in India. UTI’s investible funds, at market value grew from INR 49 crore in 1965

to INR 219 crore in 1970-71 to INR 1,126 crores in 1980-81 and further to INR 5,068 crores in 1987. Its investor base as on 1987 had grown to about two million investors. In 1986 it launched its first equity growth fund which proved to be a grand marketing success. In the same year it had also launched Indian Fund- the first Indian offshore fund for overseas investors, which was listed on the London Stock Exchange (LSE). Being the only mutual fund till 1987, UTI enjoyed monopoly in the market and had experienced a consistent growth during this phase.

Phase II (1987-92)

The second phase witnessed the entry of other mutual funds sponsored by nationalized banks and insurance companies. In 1987, State Bank of India (SBI) and Canara Bank have set up SBI mutual fund and Canara Bank mutual fund under the Indian Trust Act, 1882. In 1988, UTI floated another offshore fund namely, The India Growth Fund which was listed on the New York Stock Exchange (NYSE). By 1990, the two nationalized insurance companies- LIC & GIC and three nationalized banks namely, Indian Bank, Bank of India, and Punjab National Bank (PNB) have established wholly owned mutual fund subsidiaries. In October 1989, the first regulatory guidelines were issues by RBI, but these were applicable only to the mutual funds sponsored by banks. Subsequently, the government of India issued comprehensive guidelines in 1990 which were applicable to all mutual funds. With the entry of public sector funds during this phase, there was a tremendous growth in the size of mutual fund industry with investible funds at market value, increasing to INR 53,462 crores and the number of investors had increased to over 23 million. The buoyant equity markets in 1991-92 and the tax benefit under equity linked saving schemes enhanced the attractiveness of equity funds during the Phase II.

Phase III (1992-97)

In this phase, two important developments have taken place in the Indian mutual fund industry. One, that the mutual funds were brought under the ambit of SEBI which issued Mutual Fund regulations in 1993 bringing all funds except UTI under a common regulatory framework. Another development was the permission granted to private domestic and foreign players to launch funds. Consequently Kothari group of companies, in joint venture with Pioneer, a US fund company, set up the first private mutual fund in

1993 under the title ‘Kothari Pioneer’ Mutual Fund. Several other private sector mutual

funds were set up during this phase. UTI launched a new scheme namely: Master-gain in 1992 which was a phenomenal success with a subscription of INR 4,700 crore from 63

lakh applicants. With the opening up of mutual fund industry to private sector including foreign players, the industry’s investible funds at market value increased to INR 78,655

crore and the number of investors increased to 50 million. However, during 1995 and 1996, the mutual fund industry witnessed a decline. During these two years, the unit holders suffered from an erosion in the value of their investments due to a decline in the Net Asset Values (NAVs) of the equity funds. A lack of performance of the Public Sector Undertakings (PSU) funds and miserable failure of foreign funds like Morgan Stanley eroded the confidence of investors in fund managers and their perception about mutual funds turned negative. As a result of this, the average annual sales of mutual funds declined from about INR 13,000 crores in 1919-94 to about INR 9,000 crore in 1995 and 1996.

Phase IV (1997 onwards)

This phase was characterized by a more positive sentiment in the capital market, tax benefits to the investments in funds and improved quality of investor services by the mutual funds. As a result there has been a significant growth in the flow of funds in to the mutual funds. Investable funds, at market value of the industry rose to INR 1,10,000 crore in 2000 with UTI having 68 percent of market share. However, the UTI dropped a bombshell in 2000-01 on the investing public by disclosing the NAV of US-64 just at INR 5.81 as against the face value of INR 10.00 per unit which reversed the growing trend of fund flows towards the mutual fund industry. In fact this was the biggest shock of the year to the investors. Coupled with this, the crumbling global equity markets, a sluggish economy coupled with some bad investment decisions made life tough for big funds across the world in 2001-02. The consequences of this were also felt strongly in India as well. Owing to this, pioneer ITI, JP Morgan and Newton Investment management pulled out of Indian market and Bank of India mutual fund liquidated all its assets in 2002. Moreover, due to the growing competition both from Public and Private sector MFs and consequently upon the debacle of US-64, UTI lost most of its market share to other funds.

Post 2004, the industry witnessed several mergers and acquisitions. Besides many more international fund players have entered India like Fidelity, Franklin Templeton mutual

fund etc. These developments and the positive sentiment in the equity market since 2005 to 2008 have taken the mutual fund industry out of stagnation.

GROWTH AND DEVELOPMENT OF MUTUAL FUNDS IN INDIA

The Mutual funds industry that started its journey in the country in 1963 has turned as one of the important constituents of the financial sector. The industry has witnessed sufficient expansion and standardization in terms of products and services offered, regulatory mechanism, and the proliferation of large number of private sector funds both domestic and foreign. The fact is that the fund market in the country has graduated from offering plain vanilla equity and debt funds, to an array of diverse products such as Gold Funds (GF), Exchange Traded Funds (ETFs), and capital protection oriented funds and even the native funds (Fozia, 2013). Truly, the mutual fund industry in the country has come from long-way but the moot question is that whether it has realized its potential fully. In order to answer this question, we would need to critically analyze its growth. For

this purpose in the following para’s the growth that the mutual funds industry has

achieved over a certain period of time has been analyzed in respect of the following parameters:

·         Number of funds

·         Fund Schemes offered

·         Mobilization of Funds

·         Assets Under Management

·         Household Savings mobilized

·         Performance of AMCs in terms of earnings and profitability

GROWTH IN NUMBER OF FUNDS

As already stated that the first mutual fund namely UTI was established in 1963 which dominated the industry in the country till 1992. With the entry of other public sector and private sector funds, it gradually lost its dominance. As can be seen from Table 1.1 that

the number of mutual funds which were 31 in 1997-98 have grown to 41 in 2010-11 at a compound growth rate of 2 percent which doesn’t compare well with the growth rates in

other emerging economies of the world. As compared to 2 percent growth rate in India, the mutual fund industry worldwide has registered a compound growth rate of 40 percent during 1990-2009 as becomes clear from the data detailed in Table 1.2. During the said period, the number of private sector funds have grown from 21 funds in 1997-98 to 35 funds in 2010-11 at a compound growth rate of 4 percent. Compared to this, the public sector funds have witnessed a significant decline. The number of funds which were 10 in 1997-98 has declined to 6 funds in 2010-11 at a negative compound growth rate of 4 percent. What emerges from the date detailed in Table 1.1 is that during the period between 1997-98 to 2010-11 mutual fund industry in India was characterized by a significant decline in the number public sector funds and somewhat sufficient growth in the private sector funds. As on 2011 the mutual fund industry in the country is dominated by the private sector funds. Though India has achieved sufficient growth in the number of fund houses over a period of time but the mutual funds market is highly concentrated. Out of the 44 AMCs operating in India, approximately 80 percent, of the AUM is concentrated with 11 leading players in the market. These funds includes HDFC Mutual Fund (13 percent), Reliance Mutual Fund (12 percent), ICICI Prudential (10 percent), UTI (9 percent), Birla Sun Life (9 percent), SBI Mutual Funds(7 percent), Franklin Templeton (5 percent), IDFC Mutual Fund (5 percent), Kotak Mahindra Mutual Fund (4 percent), DSP Black Rock Mutual Fund (4 percent) and Axis Mutual Fund (2 percent). The remaining 33 Mutual Funds account for 20 percent of AUMs as on 2013. The remaining 33 mutual funds account for 20 percent of AUMs as on 2013. This is indicative of the fact that the market is highly concentrated. Therefore, for the healthy growth of the industry, the need is to see the disbursement of the business across the fund houses.

Note: CAGR stands for compound annual growth rate & CGR stands for compound growth rate.

Source: Figures compiled from AMFI Reports

Table 1.2: Total Number of Mutual Funds/Schemes around the world

Source: Mutual Fund Fact Book, 1990, SEBI Handbook of Statistics

GROWTH IN NUMBER OF SCHEMES

Mutual funds offer family of schemes to suit varying needs of investors. The different schemes offered are classified on the basis of their structure (Liquidity) into open ended funds and close ended funds. Based on the investment objective, these schemes are further classified into growth funds, balanced funds (Debt and Equity), income funds (debt) Tax

saving, Gilt funds and money market mutual funds. The list of different types of fund/ schemes are given in Figure 1.1.

Fig. 1.1: Different Types of Fund Schemes

Source: AMFI website

To meet the varying needs of the investing public, the mutual fund companies in the country have been continuously launching new schemes. As becomes clear from the data detailed out in Table 1.3 that throughout the period under study (1997-98 to 2010-11) 2,933 new schemes have been launched. The maximum number of new schemes i.e. 2269 or 77.36 percent of the schemes have been launched during 2006-07 to 2010-11. The launching of new schemes have grown at a compound rate of 23 percent from 1997-98 to 2010-11. Majority of the new scheme launched during the period included Regular Income Scheme (81.79 percent) and Growth Schemes (11.56 percent). As becomes clear from the data detailed in Table 1.3 the two schemes together accounted for 93.35 percent of new schemes launched during the period. The rest of the schemes, i.e. Balanced, Equity Linked Saving Scheme (ELSS) Gilt, Money Market (MM) and other schemes accounted for 1.09 percent, 1.36 percent, 1.16 percent, 1.98 percent and 1.06 percent of the new schemes launched respectively. What becomes clear from the above discussion is that the

Indian mutual fund industry has launched good number of new schemes, however, majority of the new schemes launched during the period were Regular Income Schemes followed by Growth Schemes.

Table 1.3: New Schemes Launched (category wise)

Note: CAGR stands for compound annual growth rate.

Source: Figures compiled from AMFI Reports

Perusal of data detailed out in Table 1.4 also reveals that the total number of schemes in operation have grown from 235 schemes in 1997-98 to 1,131 schemes at a compound growth rate of 14 percent which compares well with the growth rates of other developing economies. Category-wise, Income, Growth, Balanced, Gilt, Money Market and other schemes have grown at a compound growth rate of 18 percent, 13 percent, 4 percent, 6 percent, 7.9 percent and 37.2 percent respectively as becomes clear from the data detailed out in Table 1.5. It can also be seen from the above referred table that ELSS is the only scheme which has recorded negative compound growth rate of 2 percent in the number of schemes in operation during the period. The number of schemes in operation as on

2010-11 are dominated by regular income scheme which account of 52.25 percent of the total schemes in operation. The growth scheme as on 2010-11 accounted for 29 percent of the total schemes in operation. As such these two schemes accounted for 81.25 percent of the total schemes in operation in 2010-11 and rest of the schemes namely Balanced, ELSS, Gilt, Money Market and other schemes accounted for 2.82 percent, 4.24 percent, 3.27 percent, 4.51 percent and 3.89 percent respectively. Thus it can be safely concluded that the scene in the Indian mutual fund industry is dominated by the Regular Income Schemes followed by the Growth Schemes right through the period under study i.e. 1997-98 to 2010-11.

Table 1.4: New Schemes Launched & Total Schemes in Operation

Note: CAGR stands for compound annual growth rate

Source: Figures compiled from AMFI Reports

Table 1.5: Total Schemes in Operation Category Wise

Note:

·         CGR stands for compound growth rate.

·         ELSS stands for equity linked saving scheme

·         MMMF stands for money market mutual funds Source: Figures Compiled from AMFI Reports

FUNDS MOBILIZED

Launching more and more new schemes are aimed at meeting the varied needs of the investing public in order to mobilize more funds. As such launching new schemes serves the purpose only when such schemes have enabled to mobilize more and more funds. The total funds raised by the mutual fund industry in the country has increased from INR 18,701 crores in 1997-98 to INR 88,59,515 crores in 2010-11 thereby having registered a compound growth rate of 67 percent as becomes clear from Table 1.6. It can be seen from the said table that public sector mutual funds were major mobiliser of funds in the years 1997-98 and 1998-99 accounting for 82.69 percent and 65.50 percent respectively of the total funds mobilized. After 1998-99, the private sector mutual funds dominated the mutual fund industry in terms of funds mobilized. The private sector funds which

accounted for just 34.50 percent of the total funds mobilized in 1998-97 have increased its share to 71.40 percent in 1999-00 which kept increasing up to 2003-04 to 90.59 percent. However, the share of private sector mutual funds declined after 2003-04 to 76.84 percent of the total funds mobilized in 2009-10. But surprisingly in 2010-11 the share of private sector mutual funds declined sharply to 21.86 percent only which seems to be an exceptional event. What emerges from the above is that mutual industry in the country has witnessed some growth in the amount of funds mobilized over the period under study. Further, private sector funds which accounted for little portion of the funds mobilized in 1997-98, have overtaken public sector funds significantly and till 2009-10 these funds occupied dominant place with respect to the mobilization of funds. Category wise: Regular Income Funds accounted for major portion of the funds mobilized in the years from 1997-98 to 1999-00 with a total contribution of 68.33 percent, 64.27 percent and 29.64 percent respectively followed by Balance Funds in 1997-98 which accounted for 25.19 percent. In 1998-99, the other major contributor was Money Market Funds which accounted for 25.95 percent of the total funds mobilized. After 2000-01, most of the funds in the industry were mobilized in Money Market Funds whose share in 1998-99 was 25.95 which had increased to 83.92 percent in 2006-07 and as on 2010-11 it remained at 74.49 percent. As against this the Income Scheme which accounted for a major portion of the funds mobilized in 1997-98 had witnessed a steady decline in its share of funds mobilized during the reference period (1997-98 to 2010-11). Its share had declined from 68.33 percent in 1997-98 to a low of 10.89 percent in 2006-07 and as on today it accounted for 24.52 percent only. After 2000-01 the other schemes namely Growth, Balanced, ELSS, Gilt, Money Market and other schemes contributed very little to the total funds mobilized. The combined share of these schemes ranged only between 4 to 5 percent which is negligible by all standards. From the above discussion, two inferences can be drawn that over a period of time, the Money Market Mutual Funds (MMMF) emerged as a major contributor to the funds mobilized and since 2000-01 it continues to dominate the industry in terms of funds mobilized. Contrary, the Income Scheme which was initially dominant schemes gradually lost its ground to the MMMF and had witnessed a sharp decline in the share of funds mobilized during the period. Among other schemes, except ELSS and Growth Schemes, all other schemes have registered little or no growth in the funds mobilized. The Growth & ELSS Scheme have

registered sufficient growth in the funds mobilized during the period but right from the beginning ELSS Scheme accounted for very little portion of the funds mobilized, but is gaining popularity. The Growth Scheme which continued to be one of the important schemes till 2000-01 witnessed significant decline in its share to the total funds mobilized by the industry and as on 2010-11 its contribution has been negligible.

Table 1.6: Category Wise Funds Raised by Total Schemes in Operation (INR in Crores)

Note:

·         CGR stands for compound growth rate

·         ELSS stands for equity linked saving scheme

·         MMMF stands for money market mutual funds

·         Others include Gold ETF, other ETF & FOF overseas Source: Figures Compiled from AMFI Reports

ASSETS UNDER MANAGEMENT OF MUTUAL FUNDS

Mutual Funds are expected to play a crucial role of mobilizing particularly household savings and to manage the funds efficiently so as to provide sufficient return to the investors. Although, the Indian mutual funds have to go a long way in its role play on the

above referred lines yet, over a period of time it has achieved some noticeable growth & development. As becomes clear from the data detailed in Table 1.7 that the net assets under the management of mutual funds have increased from INR 68,984 crore in 1997-98 to INR 5,92,250 crore in 2010-11 at a compound growth rate of 20 percent. It can also be seen from the above referred table that during the reference period, the maximum growth has been recorded by the private sector mutual funds and the public sector mutual funds have gained little growth. The private sector mutual funds have recorded a compound growth rate of 48 percent in the net assets under its management during the period 1997-98 to 2010-11. Compared to this phenomenal growth rate, the net assets under the management of public sector mutual funds have grown just at a compound growth rate of 6 percent during the same period which by all means is dismal. Of the two sectors, the public sector mutual funds have witnessed a sharp decline in its share of the total net assets under the management of mutual funds. From the data presented in Table 1.7 reveals that 94.07 percent of the total assets were under the management of public sector funds in 1997-98 which had declined to 22.1 percent in 2010-11. This sharp decline is due to the increasing dominance of the private sector mutual funds in India. The private sector mutual funds which were an insignificant player in the industry in 1997-98 with a total share of 5.93 percent of the total assets under its management, have witnessed significant spurt in its business share. The assets under its management have witnessed an increasing trend and have increased from 5.93 percent in 1997-98 to 77.9 percent in 2010-11. The fact that becomes evident from the data presented in Table 1.7 is that the public sector mutual funds have lost its dominating role to the private sector mutual funds. Based on multiple parameters, the private sector mutual funds as on 2011 are major and dominating player in the Indian mutual fund industry.

Table 1.7: Assets Under Management as on March 31 Category Wise