Mutual Funds in India: The Past, Present and Future

Mutual Funds pool money from several investors and invest in marketable securities. They are professionally managed instruments and are an excellent alternative for investors who want to  invest but do not understand the stock markets. Mutual funds also have a high potential to give high returns, helping investors build long-term wealth. This could be why Mutual Funds have gained immense popularity in the last few years.

Read to find out how mutual funds have evolved in the last sixty years.

Mutual funds and the economy

Although the Mutual Fund industry was born way back in 1963, it only gained importance post-1991 economic reforms.

Why's that?

The private sector and foreign companies were allowed to introduce new Mutual Funds to India. This led to a surge in the number of Mutual Fund Houses or Asset Management Companies, investors, and total assets under management (AUM). The AUM increased from Rs 470 billion in 1993 to ₹ 39,46,257 crore  in 2023, a 25% CAGR (compound annual growth rate) in 30 years. This shows how quickly Mutual Funds gained popularity in the Indian markets

So how do mutual funds contribute to the Indian economy?

Mutual Funds act as financial intermediaries. This means they facilitate money transfers from investors to companies. When you invest in a Mutual Fund, the fund manager buys shares of a company. This increases the capital for that company, which in turn will be used for expanding the business, research, or maintaining the current growth. All this will make the company successful, which is healthy for the economy as it leads to higher gross domestic product (GDP). Now imagine what would be the contribution of thousands of companies pooling money from mutual funds!

Mutual funds in India vs other countries

A Dutch Merchant created the first mutual fund ever in 1774 in Europe. He pooled money from investors and created a diversified fund of bonds. After that, mutual funds spread like wildfire from Europe to the UK and the US. Two and half centuries later, mutual funds are still one of the most popular investment options across the globe.

Despite being late in the game (early 1960s), India's mutual fund industry is growing rapidly.

But still, India’s mutual fund market is underpenetrated. India’s AUM to GDP ratio is only 16%, whereas the global average is around 75%. This shows there is a lot of scope for growth in this industry. As the masses slowly accept mutual funds, India's AUM to GDP ratio is also expected to improve over the years.

Below are the rankings of countries whose AUM to GDP percentage is the highest in the world in 2020.

Source: TheGlobalEconomy.com

History of Mutual funds in India

Since its inception in 1963, the Indian Mutual Fund industry has undergone several changes. Broadly,  sixty years (1963-2023) of the Mutual Fund industry can be divided into five phases, with each phase encouraging saving and investing.

The first phase lasted for about 23 years and was entirely under the control of UTI, a government entity.

In 1987, public sector banks first issued Mutual Funds, marking the beginning of the second phase. In six years (1987-1993), the AUM has grown by a CAGR of 38.4%, indicating an increase in acceptance and trust on the part of investors.

The third phase, which lasted for ten years (1993-2003), is one of the important phases for the growth of mutual funds in India. The government allowed private sector companies to issue Mutual Funds. As a result, the number of Mutual Funds and the AUM went up dramatically.

In the fourth phase (2003-2014), a global financial crisis hampered the Mutual Fund industry's growth which shook investor confidence.

To re-establish investor confidence, the Securities and Exchange Board of India (SEBI) introduced a slew of measures in the fifth phase (Since 2014). SEBI's efforts paid off, and the Indian Mutual Fund industry witnessed steady inflows.

As of January 31, 2023, the industry AUM stood at Rs 39.62 trillion with over 142 million folios and 62 million active SIP (Systematic Investment Plan) accounts. Although SEBI's regulatory measures helped this growth, the distributors, agents, and technology provided last-mile connectivity and expanded the retail investor base.

Astounding facts about the mutual fund in India

Indian Mutual Funds industry has undergone dramatic changes in the last sixty years to become one of the most talked about sectors in the world. Following are some of the most noteworthy facts about the Indian mutual funds' industry.

1. India is now the world's second-largest mutual fund industry, with over $400 billion in assets under management.
2. The Mutual Fund industry in India is one of the fastest-growing markets in the world, with a CAGR growth of 17.5% over the past five years.
3. More than 46 million households have invested in Mutual Funds in India.
4. Although there are more than 40 Fund houses, the top 10 Fund houses or AMCs (Asset Management Companies) manage over 70% of the mutual fund assets in India.

Biggest mutual fund scams in India

Despite being one of the budding Mutual Fund markets in the world, the Indian Mutual Fund industry has witnessed several major scams. Following are some of the biggest scams in the Mutual Fund industry.

UTI Scam

The government set up the Unit Trust India (UTI) in 1963 to float and manage Mutual Funds. It had a monopoly for over 24 years until the government of India allowed public and private sector banks to launch their Mutual Fund schemes. Within 24 years of its monopoly, UTI built a huge investor base and handled assets worth Rs 67 billion (until 1988).

UTI offered assured return schemes (ARS) to Mutual Fund investors, where it guaranteed fixed returns. However, it failed to set up an adequate guarantee. In other words, it didn't have enough capital to pay the assured returns to investors in case they withdrew their funds. Moreover, it sets the unit price arbitrarily at a price which was more than  the value of actual assets.

The scam came into the limelight in 2001 when the markets plummeted due to the Ketan Parekh scam and other factors. The scam shook investor confidence, and they wanted to redeem their investments from UTI assured return scheme. However, lack of capital put a strain on UTI, and it banned all redemptions for six months which affected retail investors in a big way.

To add to this, the institutional investors on the UTI board withdrew their investments before the crisis came into the limelight. All this affected retail investors which led SEBI to tighten the rules of mutual funds.

Franklin Templeton Scam

Franklin Templeton is one of the oldest Mutual Fund companies in India. In April 2020, the lockdown led to a lack of liquidity in the markets. With people staying at home and all business operations coming to a sudden halt, the money supply was reduced.

Due to this illiquidity the fund house announced the closure of six debt mutual fund schemes. The total assets of these six schemes were almost Rs 300 billion. The withdrawal of the six debt schemes affected over three lakh investors. Despite investing in low-risk debt schemes, investors lost their money.

Axis Mutual Fund’s Front-running Fraudulent Scheme

One of the most recent scams in the Mutual Fund industry is the Axis Mutual Fund scam. Axis Mutual Fund, the seventh largest Fund house in the country, sacked two of its executives in May 2022 who might have engaged in front running.

Front running is an act of trading stocks after being acquainted with some transaction information that will move the prices. This is considered illegal in India, and SEBI is investigating to dig deep into this.

Mutual fund success stories

Although several scams affected Mutual Fund investors, there are quite a few success stories as well. Many investors make a fortune by investing in Mutual Funds. Below are some of the oldest Mutual Funds in India that are performing well even today. Investors who invested in these Funds would’ve accumulated a lot of wealth by now.

Franklin India Bluechip Fund – This Fund is 30 years old and has given an average return of 19.34% since inception. Had you invested Rs 1 lakh during its inception, you would've made Rs 2.01 crores by now.

Franklin India Prima Fund – This 30-year-old midcap Fund has given an average return of 18.88% per annum since inception. Investing Rs 1 lakh in 1993 would have been Rs 1.79 crores now.

HDFC Flexi cap – This 28-year-old fund has given almost 18.04% return since its inception. This means that every year, the value of the fund grew by an average of 18%. So had you invested Rs 1 lakh in 1995 in this fund, it would be Rs 1.03 crores today.

HDFC TaxSaver – This Fund was introduced in 1996 and has given an average return of 23.27% since its inception. Had you invested Rs 1 lakh in this fund 27 years ago, you would be sitting at a profit of Rs 2.82 crores (current value Rs 2.83 crores).

Are Mutual Funds better than gold and real estate?

Even today, real estate and gold are the most preferred investments by many, especially baby boomers and generation X. When these generations started investing, there weren’t a lot of investment options available other than real estate and gold. Moreover, gold and real estate were considered wealth creators that lasted for generations. This could be why these two were the go-to investments.

The current generation has no dearth of choices, and multiple investment options are available such as shares, Mutual Funds, currency, and private equity. Among these, the most popular one is Mutual Funds.

Mutual Funds pool money from diverse investors and invest in equity and debt securities. The reason behind its popularity is that they fit into the middle-class budget. The minimum investment for Mutual Funds is just Rs 500, and setting aside such a small amount every month bodes well for the middle class. This isn't possible with gold and real estate. With gold prices climbing daily, investing in gold or buying gold jewellery is becoming a far-fetched dream. The same is the case with real estate. Buying a piece of land or investing in a house requires a huge sum of money. Although a home loan is an option, with rising interest rates, it could take years to repay the loan dues.

Mutual Funds are superior to gold and real estate, even in terms of returns. Since Mutual Funds invest in marketable securities, the chances of making huge wealth in a few years are possible. However, this is not the case with gold and real estate, as these asset classes don't offer steep returns.

In terms of liquidity, gold ranks ahead of Mutual Funds and real estate. However, Mutual Funds are quite liquid, and real estate has very low liquidity. With respect to risk, Mutual Funds are considered very risky as they invest in marketable securities. However, the risk is compensated with high returns. Gold and real estate are considered less risky than Mutual Funds as their value has only gone up with hardly any depreciation.

Since each asset class has pros and cons, it is better to balance out a portfolio by spreading the investments across multiple asset classes. One can invest in both Mutual Funds and gold; however, the allocation depends on the risk tolerance levels of the investor. However, experts recommend investing a maximum of 10% in gold. This is because gold acts as an excellent hedge against market volatility. When it comes to real estate, it totally depends on the resources the investor has – a real estate is definitely an investment option if one has enough money to invest in it.

Why should the young generation invest in Mutual Funds?

The present young generation has endless opportunities to grow their money and wealth. This was never the case with previous generations, as all they had was a single-income job. However, the present generation has several income sources, and side hustling has become a routine. While working hard is one way to make more money, investing is a smart way to build long-term wealth.

Investing helps build a financially secure future by making your money work for you. Investing from a young age will allow one to accumulate more money and reach all financial goals sooner than expected. Although there are several investment options available, Mutual Funds are quite popular.

Several reasons contribute to this popularity, such as low minimum investment and monthly SIP breaking big financial goals into easily achievable instalments. Apart from this, the huge potential to give high returns long-term has made them an attractive choice for investors.

Equity Mutual Funds have outperformed Fixed Deposits (FDs) in the last decade by 11% - 18%. They are expected to give a similar return in the future as well. With such high returns, it’s no wonder that Mutual Funds have instilled confidence in the mind of investors, especially the middle class who prefer FDs.

The current young generation has the one thing Mutual Funds need - time. Mutual Funds have always performed well in the long term. With an abundance of time, the current generation can accumulate a lot of wealth for themselves.

Let's see how. By starting early in life, the financial burden of saving is reduced. If you start investing Rs 1,000 per month from the age of 21 for 39 years at a below-average rate of 10% per annum, you can accumulate Rs 22.79 lakhs by the time you are 60. Imagine the corpus you can build by investing Rs 5,000 or Rs 10,000 a month at a higher rate! So, if you are not investing at a young age, you are definitely missing out on time. However, assessing your recourses, goals, and risk tolerance levels is best before investing.

Happy investing!

Sources:

• Indian Mutual Fund Industry’s Average Assets Under Management (AAUM) stood at ₹ 40.69 Lakh Crore (INR 40.69 Trillion) - Last accessed 17th February 2023
• Mutual Funds in India- Exploring the Economic & Other Key Dimensions - Last accessed - 26th February, 2023
• Mutual fund assets - Country rankings - Last accessed 26th February, 2023
• 50 mutual fund schemes completed 25 years this year. How much returns did they offer? - Last accessed - 26th February 2023