How India’s First Mutual Fund Shaped the Investment Landscape, Discover the History Here

A robust financial market with broad participation is crucial for the growth of any economy. India’s journey toward building such a market began with the introduction of mutual funds, aiming to encourage saving and investment among its citizens. Over the years, the mutual fund industry has experienced remarkable growth, evolving through various phases that have shaped the financial landscape of the country.

Mutual fund investments are subject to market risks. They do not offer guaranteed returns. The value of investments may fluctuate, and investors may not recover the full amount invested.

Here’s a brief history of mutual funds in India, according to the information available on the official website of the Association of Mutual Funds in India.

A vibrant financial market with widespread participation is crucial for a developed economy. To foster this, India launched its first mutual fund in 1963—the Unit Trust of India (UTI). Initiated by the Government of India and the Reserve Bank of India, UTI aimed to promote savings, investment, and public participation in the income and profits generated from managing securities.

In recent years, the mutual fund industry has seen remarkable growth. The evolution of mutual funds in India can be broadly categorised into five distinct phases;

Phase 1: 1964-1987 – The Foundation of the Mutual Fund Industry

India’s mutual fund industry began in 1963 with the creation of the Unit Trust of India (UTI) by an Act of Parliament. UTI operated under the regulatory oversight of the Reserve Bank of India (RBI). In 1978, UTI was separated from RBI control, and the Industrial Development Bank of India (IDBI) assumed regulatory and administrative responsibilities. The first scheme launched by UTI was the Unit Scheme 1964 (US ’64). By the end of 1988, UTI had assets under management (AUM) totaling ₹6,700 crores.

Phase 2: 1987-1993 – Entry of Public Sector Mutual Funds

In 1987, public sector mutual funds began to emerge, with entities like public sector banks, Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC) entering the market. SBI Mutual Fund was the first mutual fund outside UTI, established in June 1987, followed by Canbank Mutual Fund (December 1987), Punjab National Bank Mutual Fund (August 1989), and others. LIC launched its mutual fund in June 1989, and GIC in December 1990. By the end of 1993, the mutual fund industry’s AUM had grown to ₹47,004 crores.

Phase 3: 1993-2003 – Entry of Private Sector Mutual Funds

The formation of SEBI in 1992 marked a significant milestone for the Indian securities market, providing regulation and protection for investors. In 1993, SEBI introduced its first set of mutual fund regulations, allowing private-sector mutual funds to enter the market. Kothari Pioneer, which later merged with Franklin Templeton, was the first private-sector mutual fund, registered in July 1993. This opened the door to more diverse mutual fund offerings for Indian investors. By January 2003, the industry had 33 mutual funds managing AUM of ₹1,21,805 crores, with UTI alone managing ₹44,541 crores.

Phase 4: 2003-2014 – Industry Consolidation and Challenges

In February 2003, the Unit Trust of India Act was repealed, and UTI was split into two entities: the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund, which came under SEBI regulations. This phase saw significant consolidation within the industry, as several private-sector funds merged. The global financial crisis of 2008-09 negatively impacted the industry, leading to investor losses and decreased confidence. SEBI’s abolition of the entry load in 2009 further strained the industry, which saw sluggish growth in AUM from 2010 to 2013.

Phase 5: 2014 Onwards – Renewed Growth and Expansion

From May 2014, the mutual fund industry entered a phase of rapid growth, supported by regulatory measures from SEBI aimed at expanding the industry’s reach, particularly in tier II and tier III cities. This period also saw significant increases in both AUM and investor folios. In May 2014, the industry’s AUM crossed ₹10 trillion, and by August 2017, it had doubled to ₹20 trillion. By November 2020, the AUM exceeded ₹30 trillion.

As of August 31, 2024, the Indian mutual fund industry’s AUM had soared to ₹66.70 trillion, a more than six-fold increase in a decade. Investor folios grew from 8.53 crore in August 2019 to 20.45 crore in August 2024, with an average of 19.87 lakh new folios being added monthly over the past five years. Mutual fund distributors played a vital role in driving this growth, particularly through popularising Systematic Investment Plans (SIPs), with SIP accounts increasing from 1 crore in April 2016 to 9.61 crore as of August 2024.