A mutual fund is a trust that pools the savings of a number of investors with common financial goals. The collected money is invested in various instruments like debentures, shares, etc. The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units owned by them.
INCEPTION
The concept of mutual funds was introduced in India with the formation of Unit Trust of India in 1963. The first scheme launched by UTI was the now infamous Unit Scheme 64 in 1964. UTI continued to be the sole mutual fund until 1987, when some public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India set up mutual funds. It was only in 1993 that private players were allowed to open shops in the country. Today, more than 33 mutual funds are operating under hundreds of schemes.
SHORT HISTORY
The government of India set up Unit Trust of India in 1963 by an act on parliament. UTI functioned under the regulatory and administrative control of the Reserve Bank of India till 1978. The Industrial Development Bank of India took over the regulatory and administrative control that year. The first scheme launched by UTI was Unit Scheme 1964. The second phase of the mutual fund industry began with the public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India setting up their own mutual funds in 1987. Finally, in 1993 Kothari Pioneer (now merged with Franklin Templeton) became the first private sector mutual fund to start operations in the country. A host of private sector as well as foreign funds set up shop after that. In 1996, a comprehensive and revised Mutual Fund regulation was put in place. The industry now functions under SEBI (Mutual Fund) regulations, 1996.
The industry faced its toughest challenge when the US 64 fiasco shattered the confidence of investors. However, in 2003, the government bifurcated the erstwhile UTI. One entity manages the assets of US 64 and some assured return schemes. The other is a regular mutual fund working under the SEBI regulations. Thanks to the boom in the stock market, UTI managed to clean up its act and continue to enjoy the confidence of crores investors. The whole industry also came out of the controversy without any major setbacks.
CONCEPTION AND PERFORMANCE
The industry has steadily grown over the decade. For example, before the public sector mutual fund’s entry, UTI was managing around Rs. 6,700 crore on its own. Public sector mutual funds also helped accelerate the growth of assets under management. UTI and its public sector counterparts were managing around Rs. 47,000 crore when Kothari Pioneer, the first private sector mutual fund, set up shop in 1993. Before the US 64 fiasco, there were 33 mutual funds. The UTI was way ahead of other mutual funds. The industry overall has performed well over the years. Of course, there were a few funds houses, which disappointed investors. However, overall performance has been good. However, lack of awareness still impedes the growth of the mutual fund industry. Unlike developed countries, most of the household savings still go to bank deposits in India.
WORKING OF MUTUAL FUNDS
A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms—a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. All mutual funds except UTI functions under SEBI (Mutual Fund) regulations 1996.
The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value (NAV) of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load.