Part 16 Timeline: History of Mutual Funds Global Indian
Part 16 - Timeline: History of Mutual Funds (Global and Indian)
The Complete Guide to Mutual Funds: History, Pros, Cons & Evolution
Global History
1774:
The first mutual fund-like structure, "Eendragt Makt Magt" (Unity Creates Strength), is established in the Netherlands by Adriaan van Ketwich, pooling money from investors to create a diversified bond fund.
1890s:
Mutual funds spread to the United States, with closed-end funds gaining popularity.
1924:
The first modern mutual fund, Massachusetts Investors Trust (MIT), is launched in the USA, introducing open-end funds. It opens to investors in 1928.
1933-1940:
The U.S. passes key regulations (Securities Act of 1933, Securities Exchange Act of 1934, Revenue Act of 1936, Investment Company Act of 1940), establishing transparency, investor protection, and tax guidelines for mutual funds.
1980s-1990s:
Global mutual fund industry sees explosive growth due to new product introductions (e.g., municipal bond funds, international funds) and wider distribution through retirement plans like 401(k)s.
2003:
U.S. mutual fund scandal involving late trading and market timing leads to stricter regulations.
2020:
Global open-end mutual fund assets reach $63.1 trillion, reflecting widespread adoption.
Indian History of Mutual Funds -
1963:
The Unit Trust of India (UTI) is established by the Government of India and Reserve Bank of India (RBI), marking the start of mutual funds in India. The first scheme, Unit Scheme 1964 (US-64), is launched.
1978:
UTI is delinked from RBI, and the Industrial Development Bank of India (IDBI) takes over regulatory control.
1987:
Public sector banks and institutions enter the market. SBI Mutual Fund, the first non-UTI mutual fund, is launched in June, followed by Canbank Mutual Fund (Dec 1987), LIC Mutual Fund (1989), and GIC Mutual Fund (1990).
1992:
Securities and Exchange Board of India (SEBI) is established, becoming the regulator for mutual funds.
1993:
Private sector mutual funds are allowed. Kothari Pioneer (later merged with Franklin Templeton) becomes the first private mutual fund. SEBI introduces Mutual Fund Regulations. Systematic Investment Plans (SIPs) are introduced.
1996:
SEBI revises and strengthens Mutual Fund Regulations, which remain in effect today.
2003:
UTI is bifurcated into Specified Undertaking of UTI (SUUTI) and UTI Mutual Fund, following the repeal of the UTI Act 1963. The industry enters a consolidation phase.
2009:
Global financial crisis impacts Indian markets, shaking investor confidence. SEBI abolishes entry loads, further challenging the industry. Slow AUM growth occurs from 2010-2013.
2012:
SEBI introduces measures to revive the industry, focusing on penetration in Tier II and Tier III cities.
2014:
Industry AUM crosses ₹10 trillion in May. The fifth phase begins with steady inflows and growth, supported by a new government and SEBI reforms.
2017: AUM crosses ₹20 trillion in August. AMFI launches the "Mutual Funds Sahi Hai" campaign to educate investors.
2018-2019:
IL&FS and DHFL crises cause liquidity issues in debt funds, impacting NAVs and investor confidence.
2020:
Franklin Templeton India winds up six debt funds due to liquidity issues, prompting SEBI penalties. AUM crosses ₹30 trillion in November.
2023:
AUM reaches ₹50.78 trillion by December. SIP accounts grow to 6.97 crore by August.
2024:
AUM hits ₹61.33 trillion (AAUM) and ₹61.15 trillion (total AUM) by June. Total folios reach 19.10 crore, with equity, hybrid, and solution-oriented schemes at 15.33 crore.
Advantages of Mutual Funds (Indian and Global Context) -
Professional Management:
India: Fund managers with expertise select securities to maximize returns, benefiting retail investors with limited market knowledge.
Global:
Portfolio managers globally monitor and rebalance investments, leveraging resources unavailable to individual investors.
Diversification:
India:
Investments across multiple sectors (equity, debt, gold) reduce risk. Losses in one asset class can be offset by gains in another.
Global:
Holding many securities globally minimizes risk compared to investing in individual stocks.
Affordability:
India:
SIPs allow investments starting at ₹500/month, making mutual funds accessible to small investors.
Global:
Lower minimum investments compared to buying individual securities directly.
Liquidity:
India: Open-end funds allow redemption at NAV, with flexible withdrawals (except for lock-in periods like ELSS).
Global: Shares can be redeemed within days, though asset-liability mismatches can pose challenges.
Tax Benefits:
India: ELSS funds offer tax deductions up to ₹1.5 lakh under Section 80C of the Income Tax Act. Long-term capital gains (LTCG) on equity funds are tax-efficient.
Global: In the U.S., mutual funds pass taxable income to investors, avoiding double taxation if IRS requirements are met.
Transparency and Regulation:
India: SEBI ensures strict oversight, with mandatory disclosures of portfolios, NAVs, and fund manager credentials.
Global: Regulated by bodies like the SEC in the U.S., requiring regular performance and fee disclosures.
Variety of Options:
India: Equity, debt, hybrid, and sectoral/thematic funds cater to diverse risk profiles and goals.
Global: Funds cover various asset classes, industries, and strategies (e.g., index funds, target-date funds).
Disadvantages of Mutual Funds (Indian and Global Context) -
High Fees and Costs:
India: Expense ratios, exit loads, and management fees can erode returns. Some funds charge high costs despite underperformance.
Global:
Expense ratios above 1.5% are considered high. Sales charges and 12b-1 fees add to costs.
Market Risk:
India:
Returns are not guaranteed and fluctuate with market conditions. Equity funds are particularly volatile.
Global:
Actively managed funds often fail to outperform benchmarks over long periods, with passively managed funds faring better.
Lack of Control:
India: Investors cannot influence specific investment decisions, relying entirely on fund managers.
Global: Fund managers’ choices may not align with individual investor preferences.
Liquidity Issues in Crises:
India: Debt fund crises (e.g., IL&FS, DHFL, Franklin Templeton) led to redemption pressures and NAV declines.
Global: Large redemptions can force funds to sell assets at distressed prices, impacting remaining investors.
Lock-in Periods:
India: ELSS funds have a 3-year lock-in, and some close-ended funds restrict withdrawals until maturity.
Global: Certain funds may have restrictions, though open-end funds generally offer better liquidity.
Tax Inefficiency:
India: Short-term capital gains (STCG) on equity funds are taxed at 15%, and debt funds are taxed as per income slab, reducing net returns.
Global:
Capital gains distributions can create tax liabilities for investors, even if they don’t sell shares.
Underperformance:
India: Over 60% of ELSS funds fail to beat benchmarks over a 10-year period.
Global:
Actively managed funds often underperform passive index funds due to higher fees and market inefficiencies.
Low Penetration (India-Specific):
India: Only 8% of the population invests in mutual funds (2023), compared to 46% in the U.S., due to low financial literacy and equity culture.
Key Observations
Indian Context:
The mutual fund industry has grown significantly, from ₹47,004 crore AUM in 1993 to ₹61.33 trillion in 2024, driven by SEBI reforms, SIP adoption, and campaigns like "Mutual Funds Sahi Hai." However, crises like IL&FS and Franklin Templeton highlight liquidity risks in debt funds. Low penetration indicates untapped potential.
Global Context:
Mutual funds are a mature investment vehicle globally, with $63.1 trillion in assets (2020). Advantages like diversification and professional management are universal, but high fees and underperformance remain challenges.
Future Outlook:
In India, AUM is projected to reach ₹100 trillion by 2030, driven by technology, fintech, and investor education. Globally, passive funds are gaining traction due to lower costs and consistent performance.
Indian-Specific Mutual Fund Terms with Meaning -
SIP Systematic Investment Plan – monthly/quarterly auto-invest
NAV Net Asset Value – price per mutual fund unit
ELSS Equity-Linked Savings Scheme – tax-saving mutual fund
Direct Plan No commission, lower expense ratio
Regular Plan Comes with advisor/agent commission
AMC Asset Management Company – manages your fund
AUM Assets Under Management – total fund size
