History and Structure of Mutual Fund

27 Oct 2020  Read 823 Views

The topic of Mutual funds was made popular in the Indian market in the past decade through extensive advertising involving popular actors and cricketers. Since the Indian audience did get intrigued, mutual funds were able to make a place for themselves in the market against many other investment schemes. 

For those who do not know about mutual funds just a little recap for them below.

Mutual funds are a collection of stocks that are either bought by a particular organization or an asset management company (AMC) for an individual. AMC takes the money from different investors and pools that money together to invest in different sectors to get a higher return with the help of a market expert.

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Let's take you to the 1900s to get into the history of mutual funds and understand how it all started.

History of Mutual Funds

In the 1960s, the government of India initiated the mutual fund concept under the act of parliament to attract small investors to invest in bigger markets. In 1963-1964, the government of India collaborated with the Reserve bank of India (RBI) and formed the Unit Trust of India. 

UTI was an investment plan in which the government used to collect money from small investors and pool all the money together to invest in the market and provide the investors with a unit of the shares called units. 

Later in 1978, rules and regulations of UTI were handed over to the Industrial Development of Bank of India (IDBI).

In 1964, the first mutual fund scheme was introduced by UTI, which was a successful attempt, and by the end of the year, 1988 UTI had around 6,700 worth of assets under their management. 

In 1987, the public sector banks and enterprises entered the mutual fund market to set up their own AMC. The State Bank of India was the first bank to set up their own AMC followed by Punjab National Bank, Canara Bank, General Insurance Corporation, and Life Insurance Corporation. 

Here is a list of the Banks which established their own AMCs;

  • State Bank Mutual Fund
  • CanBank Mutual Fund
  • Punjab National Bank Mutual Fund
  • Indian Bank Mutual Fund
  • Bank of India Mutual Fund
  • Bank of Baroda Mutual Fund

The boom in the Indian Mutual Funds Industry

This opening of the new mutual fund industry was giving expected returns to the banks and the investors. In 1993, AMCs grew up to 44,000 crores which encouraged small investors to invest in the mutual funds and gain higher returns. 

After seeing the growth of these funds, in 1993, the Government of India opened up the mutual fund industry for the private sectors and introduced the mutual fund rules and regulations system in 1996, where every mutual fund company, except for UTI, had to register under SEBI (Stock Exchange Board of India). This move was introduced to ensure better functioning, transparency and to avoid scams and frauds. 

After this move, many mutual fund banks collaborated with foreign banks. In February 2003, UTI was split into two different entities under the UTI act of 1963. 

Among the two separate entities, the first one was UTI mutual funds (State Bank of India, Punjab National Bank, Life Insurance Corporation, and Bank of Baroda) which were under the control of SEBI's regulation and mutual funds. And the second one was the Specified Undertaking Unit Trust of India (SUUTI), which was followed by the bifurcation of the former UTI and different mergers of the private sectors. This bifurcation was implemented in February 2003.

In 2012 SEBI changed various rules and regulations to bring transparency to its investors and stakeholders. Currently, the combined worth of AMC in India is approximately INR 25.5 trillion.

People know the history of mutual funds but often tend to get confused and curious to know about the legal rules and regulations and the regulatory environment of mutual funds in India. 

Let's walk through it step by step.

Legal and Regulatory Environment of Mutual Funds in India

There are different entities which regulate the mutual funds' industry in India. Some of these entities are as follows:

Trustees, Sponsor, and Asset Management Company (AMC)

AMCs invest the investor's money in the market to get a higher return and then distribute the return to the investors in terms of units and keep some portion of the profit, called expense ratio.

The sponsors are meant to set up the whole mutual fund, and they hire trustees to promote their mutual funds and attract people to invest money in their mutual funds.

Securities and Exchange Board of India (SEBI)

In India, Mutual funds are regulated by SEBI, which was formed in 1996 to regulate the mutual funds' industry to avoid scams and hacks. SEBI provides broad guidelines on the investment limits to ensure the minimum level of diversification in mutual funds. SEBI also regulates the capital market and its intermediaries. 

Association of Mutual Funds in India (AMFI)

AMFI is an association of the Indian AMCs registered under SEBI. AMFI analyzes the best practically overseeing functionality of the mutual fund industry.

Reserve Bank of India

Mutual funds are also regulated by the RBI along with SEBI. The Reserve Bank of India regulates the sponsor of sponsored bank mutual funds with the case of guaranteed return. 

RBI focuses on foreign investment in the market. Mutual fund entities have to take approval from the RBI to ensure that these entities give guaranteed returns to the investors. 

Conclusion 

Overall, the Indian mutual funds' industry in totality has evolved to become one of the best schemes that an individual can invest in today's century, which is one of the main reasons behind its popularity. 

Knowing the history of these schemes will not only help an individual understand the terms related to these funds within the industry, but it will also help one to understand the profits or the gradual growth this scheme has seen throughout the years. 

Mutual funds are rapidly evolving and have become a recent trend within every household, owing to its convenience, which is available to different sections of society. 

About the Author: Divyanshu kumar | 45 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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