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A Review on Evolution of Mutual Funds Market in India: Current Status and

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Article in Indian Journal of Economics and Business · January 2016

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 A Review on Evolution of Mutual Funds Market in India:
Current Status and Problems

Pradeep Kumar Panda

Research Scholar, School of Economics, University of Hyderabad
Email: pradeep25687@yahoo.co.in

Abstract
The economic development of a country largely influenced either by credit based financing
through financial institutions or by financial securities through capital market. Mutual Funds in
recent past as a channel of resource mobilization has gained immense importance in general and
in India in particular. India has much less exposure in the Mutual funds returns predictability
literature until recently. Given India’s fast-growing economic influence, research on this
dimension as compared Indian stock market still seems to be inadequate and needs further
investigation. The present study extends the existing literature. The mutual fund industry in India
started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of
India and Reserve Bank of India. The history of mutual funds in India can be broadly divided
into four distinct phases. The results from analysis suggests that resources mobilisation of UTI
seems to be very high in 2009-10 while period of 2007-08 evidences that Private Sector mutual
funds ranks top in the list of mutual fund mobilisation. A sharp decline in mobilization of funds
was seen in 2008-09 due to Global Financial Crisis. All the problems of mutual fund industry
can be classified in the following categories: Problems related to structure, Problems related to
the investors, Problems related to working, Problems related to performance. The mutual funds
are bound to invest the funds as per their investment objectives of each scheme published in the
offer document. After the issue is over, it becomes the mandate and the mutual funds have no
choice to invest the funds in other securities, which can provide higher returns. The greater
transparency, increased innovations, better services to the investors, liquidity and higher returns
will make mutual fund schemes more popular and investors friendly.

Key Words: Mutual Funds, History, Performance, Problems, Return, Investment

1
 A Review on Evolution of Mutual Funds Market in India:
Current Status and Problems
I. Introduction
The economic development of a country largely influenced either by credit based financing
through financial institutions or by financial securities through capital market. The financing
through capital market proves to be rapid economic development due to its instantaneous
information processing mechanism of financial sector while real sector takes some time to
process available information. In this sense, the economic development through stock market
precedes the development through real sector. Further, the ensuring efficient stock market may
result in providing strong support for economic development. More specifically, if the small
savings may be properly channelised into stock market activities, then larger inflow of capital is
possible besides ensuring efficient stock market operations.

Mutual Funds in recent past as a channel of resource mobilization has gained immense
importance in general and in India in particular. Generally, an investor prefers to invest in units
of mutual funds due to its efficient diversification. In other words, the diversification of
portfolio becomes difficult for the investor either due to in-sufficient fund or due to the absence
of expert opinion. Hence, investor attempts to find-out the best possible way of earning on his
investment by evaluation various profitable opportunities of multiple mutual fund opportunities
available to him. The selection of one mutual fund in preference to another may be largely
induced by investor's risk-return framework. For instance, if investor prefers to earn higher rate
of return, then he naturally selects his investment in growth oriented mutual fund. Further, the
examination of mutual fund performance calls for close scrutiny of return on market index. If
the mutual fund performs better than return on market index, then investors, expecting higher
return, may attempt to invest in that fund. In essence, if the mutual fund yields higher return
than market return, it can be said that it has outperformed the market index.

If the mutual fund is performing purely on the benefits of its component securities, then it
is possible to earn higher return as compared to market return. Otherwise, the return on mutual
fund is influenced by the return on market index; it means that return variation of market index
may largely induce the return on mutual fund either in positive or negative direction depending
upon its associated correlation. More specifically, if the return mutual fund strongly depends
upon the return on market index, then there is possibility of integration between them. In this
case, there is uni-directional influence from market index to mutual fund. If the operation of
mutual fund is so strong, it may also give a shock to market index, suggesting a reverse causation
from mutual fund to stock market index. It is not necessary that price influence from stock index
to mutual fund excludes the reverse influence from mutual fund to stock market index. In other
words, there is possibility of strong co-integration between them, asserting a bi-directional
influence between them. Such integration may give special information about the return on
mutual fund with help of return on market index.

The component securities in that portfolio are well diversified; it is possible to get higher
return with lesser risk. The diversification does not mean that component securities in portfolio
must match with securities in market index. It is quite possible that proxy portfolio may be
constructed that resembles the market index’s risk-return. Otherwise, the securities traded in the

2
stock market may ensure co-integration with market index. In such case, it is quite possible to
state the return on mutual fund may be predicted with help of market index. Further any such
existence may also support the superior stock selection of fund manager.

India has much less exposure in the Mutual funds returns predictability literature until
recently. Given India’s fast-growing economic influence, research on this dimension as
compared Indian stock market still seems to be inadequate and needs further investigation. The
present study extends the existing literature. The sample consists of actively managed equity
mutual funds, drawn from the aggressive growth, growth, growth and income, Equity income,
and small company investment objective categories. Index funds, funds of funds, master feeder
funds, and money market funds are not included. Since most of the domestic-equity- mutual
funds tend to have substantial holdings of foreign stocks and bonds, author has selected only
those funds that have at least 50% of their portfolios values invested in domestic stocks and no
more than 15% invested in foreign stocks. Author has also selected funds that have no more
than 15% of their portfolio values invested in bonds. The data used in the present study
have been obtained from secondary sources. Sources of the data are (i) Association of Mutual
Funds of India, (ii) Blue Chip India, (iii) CMIE publications, and (iv) Handbook of Statistics on
Indian Economy, RBI
The paper consists of four sections. The present section introduces various facets of the
study in the form of discussing the issues, objectives, methodology and sources of data
collection. The second section will focus on the various studies on mutual fund returns within
country as well as outside country. Third section outlines historical evolution of mutual funds
market in India and resource mobilization through mutual funds till date and problems of mutual
funds in India. Summary are reported and discussed in fourth section and also summarizes the
findings in a nutshell and mentions the scope and ambit of further research in this field of inquiry
and the limitation of the study.

II. Review of Literature:

The study of mutual fund is emerging subject of research among research scholars, academicians
and practitioners. There is dearth of flow of literature on this subject. This study attempts to
focus few relevant studies for this analysis.

Bello (2009) have used common indicators of business and monetary conditions, the lagged
mutual-fund-risk premium, and the market- risk premium to predict mutual-fund returns for a
time horizon of one-month. He finds that each of the five predictors significantly forecast
mutual-fund returns from April 1991 to March 2006. Further Bello have pointed out that the
indicator of monetary conditions, i.e. the federal funds premium have the strongest forecast
power Multivariate analyses confirm that the five predictors are indeed strong forecasters
of mutual fund returns and the federal funds premium, the market-risk premium, and the
lagged mutual-fund-risk premium all emerge as the best and most consistent predictors of
mutual fund returns. Moreover, the default-risk premium and term premium are found to be good
but less consistent as predictors of mutual-fund.
Chen, Roll, and Ross (1986), find that several economic variables are significant
in explaining expected stock returns including industrial production, measure of
unanticipated inflation, changes in expected inflation, etc. Chen, Roll, and Ross argue that, in
3
accordance with financial theory, the spread between long-term and short-term interest
rates, expected and unexpected inflation, industrial production, and the spread between high
and low grade bonds should systematically affect returns. Their results show that these
sources of risk are indeed significantly priced.
Similarly, Jensen and Johnson (1995), Jensen, Mercer, and Johnson (1996),
Belcher, Jensen and Mercer (2006), Patelis (1997), Thornback (1997), and others, investigate
the relation between stock and bond returns and the alternative indicators of monetary
conditions, including changes in the federal funds rate, the federal funds premium, the term
premium, et cetera. Jensen, Mercer and Johnson (1996) find that the behavior of business
conditions proxies is affected by monetary policy and that monetary developments are
associated with security return patterns. They investigate the impact of monetary influences on
security returns in the presence of three business conditions proxies including dividend yield,
default premium and term premium. They show that expected stock and bond returns move
together across changing business conditions and that the three variables are all related similarly
to both stock and bond returns. They argue that these r elations depend on the monetary
environment.
Belcher, Jensen and Mercer (2006) examine monetary conditions and business
conditions jointly. They focus on the relation between aggregate stock and bond returns
and alternative indicators of monetary conditions while conditioning on the Federal Reserve
monetary policy stance (i.e. whether the policy is expansive or restrictive). They
demonstrate that monetary conditions have a prominent and systematic relation with security
returns. They also show that Federal Reserve monetary policy has strongest relation with
security returns for cyclical industries and weakest relation with returns for defensive
industries. Moreover, they argue that monetary conditions and business conditions are related
but that they display considerable independence. They show that the changes in the federal
funds rate, the federal funds premium (i.e. the difference between federal funds rate and Treasury
bills rate) and the term premium (i.e. the difference between 10-year Treasury bond rate and the
rate on one-year Treasury securities) have significant relation with future stock returns in
line with Patelis (1997) and Thornback (1997). Belcher, Jensen and Mercer also show that
only the federal funds premium and the term premium significantly predict bond returns and
that the term premium provides the greatest explanatory power for both stock and bond
returns.
Jensen and Johnson (1995) contend that monetary stringency affects required returns.
Similarly, Jensen, Mercer, and Johnson (1996) find that term premium, default premium,
and dividend yield can forecast expected returns. They also find that default premium and
term premium are significantly higher when the Fed is following an expansive monetary policy
than during restrictive policy, and that stock and bond returns are significantly higher
during expansive policy and negative during restrictive periods. Becher, Jensen and Mercer
(2006), and others, demonstrate that the ability of the measures of monetary policy to predict
security returns is improved substantially by including a variable that indicates the Federal
Reserve Bank’s policy stance, in other words, monetary stringency plays a key role in
determining the association between changes in the short-term monetary indicators and future
stock returns.

4
 Chan, Karceski, and Lakoniskok (1998) evaluate the performance of various factors in
capturing return co-movements, thus the sources of portfolio risk, and find that except for default
premium and term premium, macroeconomic factors do poorly. Chan, Karceski and Lakonishok
are not specifically concerned with the determinants of expected returns, rather, their purpose is
to identify factors that drive common variation in stock returns, whether the factors are priced or
not. Fama (1984), and others, find that forward rates contain variation in expected return
on multiperiod Treasury bills. Fama finds that one-month forward rate has power to predict the
spot rate one month ahead. Keim and Stambaugh (1986) address the proposition that the
level of prices is related to the level of expected risk premiums, that is whether current
level of asset prices can predict future returns. They find that several variables that reflect the
level of bond and stock prices predict returns on common stocks of firms of various sizes, long-
term bonds of various default risks, and default-free bonds of various maturities.
Kothari and Shanken (1997) find that the book-to-market-value (B/M) ratio
predicts market returns in the 1926-1991 period. Similarly, Further, Pontiff and Schall (1998)
find that variables such as default spreads, interest rates, term spread, and dividend yields predict
market returns. Moreover, Pontiff and Schall examine the ability of an aggregate B/M ratio to
forecast market returns. In line with Kothari and Shanken, they show that the B/M ratio predicts
market returns as well as small-firm excess returns, and that the ratio contains information about
future returns not captured by other variables such as yield spreads and dividend yields. Fama
and French (1988) use dividend yield to forecast returns and find that dividend yield has greater
explanatory power than earnings yield.
Treynor and Mauzy (1966) attempted to test the market timing abilities of 57 funds for
the period 1957-62 and found that only one fund out of 57 are significant in market timing
abilities. Fabozzi and Francis (1979) tested performance of 85 investment companies by using
monthly data during December, 1965 and December 1971. By using 116 open-ended funds
during the period 1968-80, Henrikson and Merton (1981) suggested that the mutual fund may
provide superior return than market index by reducing administrative costs. Latzko (1999) tested
economies of scale in administering and managing funds by using translog cost function by using
2,610 sample funds and observed the presence of economies of scale in mutual fund
administration. In a paper, Wermers (2000) focused the performance of the mutual fund at both
the stock holding level and the net return level for the period January 1, 1975 and December 31,
1994.
In Indian context, Rao and Venkateswarlu (1998) probed into UTI’s performance for
the period 1964-69 to 1993-94 and found the evidence of potential significance and growth in the
funds mobilised by UTI. Tripathy and Sahu (1998) carried-out the performance evaluation of
ten major growth oriented mutual funds by using annual return for the period October, 1994 to
September, 1995. By focusing on 22 Equity Linked Savings Schemes (Tax Saving Schemes) for
the period 1990-91 to 1994-95, Thiripalraju and Patil (1998) investigated micro forecasting
(stock selection) and macro forecasting (market timing) abilities of fund managers. By using
monthly price data of fifty securities listed on BSE during the period 1991-97, Ramachandran
(1998) attempted to investigate the possible evidence such as behaviour of beta, structural
stability of beta and alpha, CAPM and APT’s relevance and the implication of fund managers.
Kaura and Jayadev (1999) studied the performance of five growth-oriented mutual fund
during the period 1993-94 to assess the presence of excess market return and selectivity. In
5
another study, Jayadev (1999) attempted to evaluate the performance of mutual funds scheme by
using monthly closing NAVs of 62 funds up to the period March 1995 and found a support of
Sharpe and Treynor's measure in 30 and 24 cases respectively. By using 18 open-ended growth
schemes for the period April 1995 to July 1999, Sethu (1999) found in-adequate diversification
and absence of market timings in these funds.
Sehgal and Gupta (1999) investigated in market timing abilities by using weekly data of
80 mutual funds for the period June 1992 to June 1996. They opined that market timing ability
of Indian fund manager resembles with timing abilities reported in developed market.
Ramachandran (1999) employed k-mean clustering technique on 125 scripts for the period
1991-1999 and grouped 11 equity asset classes. Due to the presence of non-normality, the
portfolio risk may increase due to over-diversification of portfolio and hence, the performance
evaluation of fund will be biased.
Panda and Acharya (2011) used common indicators of business and monetary
conditions, the lagged mutual fund- risk premium and the market- risk premium to predict
mutual fund returns for a time horizon of one-day. In isolation, each of the four predictors
significantly forecast mutual-fund returns from April 2008 to March 2011 for Indian market. The
indicator of monetary conditions, i.e., the MIBOR premium, is found to have the strongest
forecast power. Multivariate analysis confirms that the four predictors are indeed strong
forecasters of mutual fund returns. Moreover, the MIBOR premium, term premium and lagged
mutual-fund-risk premium emerge as the best and most consistent predictors of mutual fund
returns. The market-risk premium is found to be good, but less consistent as predictor of mutual-
fund returns.
Hitherto, we have conducted a detailed review of existing literature. The literature on
return predictability is still mixed, evidence is not conclusive. In recent years, developments in
information technology allowed for new techniques and methodologies that triggered the study
of return predictability. Also, better coverage and quality of financial and economic data, have
broadened the research possibility set. The opportunity of using new forecasting variables or
studying new markets such as emerging markets are clear examples of this process.

This is mainly a largely unexplored area of research. Most academic studies in the mutual
fund return predictability literature have been related to Indian equity markets, but not much has
been said on developing markets Emerging markets funds invest mainly in the stock markets of
developing countries in Eastern Europe, Africa, the Middle East, Latin America, the Far East and
Asia. Hence, we wish to make assessment and submission in the Indian Market context in the
subsequent section.
III. Evolution of Mutual Funds Market in India:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases.

i) First Phase – 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act
of Parliament. It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was

6
 de-linked from the RBI and the Industrial Development Bank of India (IDBI) took
over the regulatory and administrative control in place of RBI. The first scheme
launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700
crores of assets under management.

ii) Second Phase – 1987-1993 (Entry of Public Sector Funds) : 1987 marked the entry
of non- UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June
1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual
Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while
GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual
fund industry had assets under management of Rs.47, 004 crores.

iii) Third Phase – 1993-2003 (Entry of Private Sector Funds) : With the entry of
private sector funds in 1993, a new era started in the Indian mutual fund industry,
giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted
by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996. The number of
mutual fund houses went on increasing, with many foreign mutual funds setting up
funds in India and also the industry has witnessed several mergers and acquisitions.
As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,
21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under
management was way ahead of other mutual funds.

iv) Fourth Phase – since February 2003 : In February 2003, following the repeal of the
Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with assets under management of
Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of
US 64 scheme, assured return and certain other schemes. The Specified Undertaking
of Unit Trust of India, functioning under an administrator and under the rules framed
by Government of India and does not come under the purview of the Mutual Fund
Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation 1 of
the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds, the

1
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India
effective from February 2003.

7
mutual fund industry has entered its current phase of consolidation and growth. The Assets under
management of the Specified Undertaking of the Unit Trust of India has therefore been excluded
from the total assets of the industry as a whole from February 2003 onwards.

Financial liberalization, started in the 1990’s in India, heralded the dawn of a new era in
the Indian Capital Market. In recent years, the emerging Mutual funds market of India has
generated considerable interest among regional as well as global investors largely because of a
rapid increase in its level of economic activity. The policy of globalization and financial
liberalization initiated by Indian Government in 1991 attracted considerable inflow of foreign
investment in India, both in terms of foreign direct investment, as well as portfolio investment.
The Indian economy is now a relatively open economy, despite the capital account not being
fully open. But the Indian government has continued with moves to make the capital account
fully convertible, step by step. The current account, as measured by the sum of current receipts
and current payments, amounted to about 53 per cent of GDP in 2007-08, up from about 19 per
cent of GDP in 1991. Similarly, on the capital account, the sum of gross capital inflows and
outflows increased from 12 per cent of GDP in 1990-91 to around 64 per cent in 2007-08. India
has gradually emerged as an important destination of global investors’ investment in emerging
equity markets. India's stable 8-9 per cent growth, rising foreign exchange reserves along with a
booming consumer market and easy availability of skilled personnel have been instrumental in
attracting several foreign companies to invest in India. Furthermore, India’s workforce,
demography and technology have contributed immensely to its success in attracting investors.
The purchase and sales activities of foreign institutional investors (FIIs) account for three fourths
of the average daily turnover in India’s stock market. The inflow of foreign funds with entry of
FIIs has transformed the style of functioning of the Indian stock market. As of now FIIs are
allowed to invest in all categories of securities traded in the primary, secondary and in the
derivatives segment including government securities. The Indian companies have been permitted
to raise resources from abroad through the issue of Global Depository Receipt (GDR), American
depository receipt (ADR) and Foreign Currency Convertible Bonds (FCCBs) and External
Commercial Borrowing (ECBs). Foreign companies are also allowed to tap the domestic stock
markets. The investment norms for Non-resident Indians (NRIs), Persons of Indian Origin (PIOs)
and Overseas Corporate Bodies (OCBs) have been largely liberalized, inter alia, with permission
to purchase of shares without any prior approval from the Reserve Bank of India (RBI). The
Reserve Bank of India (RBI) permitted two-way fungibility for ADRs / GDRs, which meant that
investors (foreign institutional or domestic) who hold ADRs / GDRs can cancel them with the
depository and sell the underlying shares in the market. Nowadays there are many overseas
securities listed in various stock exchanges while investors have immediate information from
every stock market in the world and are able to conduct transactions everywhere and from
everywhere on the planet. The Indian stock exchanges have been allowed to set up trading
terminals abroad. The trading platforms of Indian exchanges are now accessed through the
internet from anywhere in the world. Ten major Indian companies listed on the New York Stock
Exchange (NYSE) account for a 19 per cent weight in the benchmark 30-scrip stock price index
of the BSE. Fifty Indian companies are listed on the London Stock Exchange. The globalization
of the Indian stock market is reflected in catching up with the best international practices, inter
alia, dematerialization of shares, replacement of the Indian carry forward trading system called
badla by the index-based and scrip-based futures and options; rolling settlement (T+2), electronic

8
open limit order book trading, strengthening of corporate governance practices and enhanced
transparency and disclosure standards.

Table 1.1 provides a comprehensive picture of Net Resources Mobilised by Bank-Sponsored and
FI-Sponsored Mutual Funds for period 1993-2015.

Net Resources Mobilised by Bank-Sponsored and FI-Sponsored Mutual Funds

Bank-sponsored FI-sponsored
Canara Indian Baroda Total (2 to
Year SBI BOI PNB GIC LIC IDBI
Robeco Bank Pioneer 10)
MF MF MF MF MF MF
MF MF MF
1 2 3 4 5 6 7 8 9 10 11
1993-
1.05 0.43 - - - - 2.27 0.11 - 3.86
94
1994-
2.18 2.06 0.94 0.54 1.56 0.38 3.20 0.69 1.87 13.42
95
1995-
0.76 0.03 - - 0.10 0.24 0.65 1.17 0.53 3.48
96
1996- -
0.03 0.02 - - - 0.02 1.69 - 1.44
97 0.32
1997- -
1.90 0.47 - - - - 1.00 1.23 4.41
98 0.19
1998- -
-0.72 -0.17 - - - - 3.48 2.11 4.58
99 0.12
1999- -
6.59 -3.61 - - 0.40 -0.02 2.85 2.79 6.32
00 2.68
2000- -
2.52 -0.05 - - 0.02 - 5.66 7.50 15.22
01 0.43
2001- -
6.14 1.40 - - 0.50 0.59 6.40 -1.78 12.69
02 0.56
2002- -
6.86 2.37 - - 0.14 0.96 5.78 3.80 18.94
03 0.97
2003- -
19.27 4.95 - - 18.41 2.63 9.34 - 53.13
04 1.47
2004- -
10.24 -0.11 - - - -3.07 -33.51 - -26.78
05 0.33
2005-
52.80 0.56 - - - 0.29 - 21.12 - 74.77
06
2006-
32.08 -0.96 - - - -0.79 - 42.26 - 72.59
07
2007-
73.39 2.95 - - - -0.38 - 21.78 - 97.74
08
2008-
26.17 13.17 - - - 5.56 - 59.54 - 104.44
09
2009- 54.37 31.30 - - - 12.88 - 48.71 - 147.26

9
 10
2010-
42.42 -24.17 - - - -5.20 - -169.88 - -156.83
11
2011-
4.22 -3.64 - - - 3.31 - -30.98 - -27.09
12
2012-
44.99 -0.46 - - - 13.77 - 13.12 7.84 79.26
13
2013-
63.49 -20.13 - - - 3.01 - 22.72 -12.01 57.08
14
2014-
-1.53 5.70 - - - -15.65 - -10.45 0.51 -21.42
15
MF : Mutual Fund SBI : State Bank of India Fl : Financial Institution BOI : Bank of India
PNB : Punjab National Bank (₹ Billion)

Source: Handbook on Statistics on Indian Economy, Reserve Bank of India, 2015

The results from Table-1 suggests that resources mobilisation of UTI seems to be very high in
2009-10 while period of 2007-08 evidences that Private Sector mutual funds ranks top in the list
of mutual fund mobilisation. Further, the total resources mobilised through various mutual funds
exhibits an increasing trend from Rs. 18 crores in 1970-71 to Rs.78, 545 crores in 2009-10. A
sharp decline in mobilization of funds was seen in 2008-09 due to Global Financial Crisis. 2
However, there is sharp increase in capital mobilisation in 2007-08 as Rs. 1, 28,032 crore,
significantly due to Private sector funds.

Table 1.2 provides a comprehensive picture of capital mobilisation of various mutual funds for
period 1975-2015. Sharp decline in capital mobilisation of various mutual funds is seen over the
years.

Bank- FI- Private

sponsored sponsored sector
Year UTI Total (2 to 5)
mutual mutual mutual
funds funds funds
1 2 3 4 5 6
1975-76 0.29 - - - 0.29
1976-77 0.35 - - - 0.35
1977-78 0.73 - - - 0.73
1978-79 1.02 - - - 1.02
1979-80 0.58 - - - 0.58
1980-81 0.52 - - - 0.52
1981-82 1.57 - - - 1.57
1982-83 1.67 - - - 1.67
1983-84 3.30 - - - 3.30
2
The Global Financial Crisis (2008) is characterized by contracted liquidity in global financial markets and banking
systems triggered by the failure of mortgage companies, investment firms and government sponsored enterprises
which had invested heavily in subprime mortgages.

10
 1984-85 7.56 - - - 7.56
1985-86 8.92 - - - 8.92
1986-87 12.61 - - - 12.61
1987-88 20.59 2.50 - - 23.09
1988-89 38.55 3.20 - - 41.75
1989-90 55.84 8.89 3.15 - 67.88
1990-91 45.53 23.52 6.04 - 75.09
1991-92 86.85 21.40 4.28 - 112.53
1992-93 110.57 12.04 7.60 - 130.21
1993-94 92.97 1.48 2.38 15.60 112.43
1994-95 86.11 7.66 5.76 13.22 112.75
1995-96 -63.14 1.13 2.35 1.33 -58.33
1996-97 -30.43 0.07 1.37 8.64 -20.35
1997-98 28.75 2.37 2.04 7.49 40.65
1998-99 1.70 -0.89 5.47 20.67 26.95
1999-00 45.48 3.36 2.96 169.38 221.18
2000-01 3.22 2.49 12.73 92.92 111.36
2001-02 -72.84 8.63 4.06 161.34 101.19
2002-03 -94.34 10.33 8.61 121.22 45.82
2003-04 10.50 45.26 7.87 415.10 478.73
2004-05 -24.67 7.06 -33.84 79.33 27.88
2005-06 34.24 53.65 21.12 415.81 524.82
2006-07 73.26 30.33 42.26 794.77 940.62
2007-08 106.78 75.97 21.78 1382.24 1586.77
2008-09 -41.12 44.89 59.54 -305.38 -242.08
2009-10 156.53 98.55 48.71 479.68 783.47
2010-11 -166.36 13.04 -169.88 -162.81 -486.00
2011-12 -31.79 3.89 -30.98 -395.25 -454.13
2012-13 46.29 67.08 22.41 652.84 788.62
2013-14 4.01 48.45 25.72 467.61 545.79
2014-15 -12.78 -7.00 -10.35 1123.9 1093.77

Source: Handbook on Statistics on Indian Economy, Reserve Bank of India, 2015

Table 1.3 provides a comprehensive picture of net resources mobilised by Private Sector Mutual
Funds for period 2001-2015. Sharp decline in capital mobilisation of privte sector mutual funds
is seen over the years.

200
Year/Mutual 200 200 200 200 200 2007 200 200 201 201 201 201 2014
4-
Fund 1-02 2-03 3-04 5-06 6-07 -08 8-09 9-10 0-11 1-12 2-13 3-14 -15
05
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
AIG -
- - -
1. Global - - - - - - 31.65 17.1 - - -
6.78 3.19 0.18
Investment 2

11
 Mutual
Fund
Alliance -
- - -
2. Capital 10. - - - - - - - - - -
1.75 9.02 8.42
MF 65
AXIS
24.4 19.0 13.2 21.0 42.3
3. Mutual - - - - - - - - 72.57
9 2 8 4 1
Fund
Benchmar -
3.7 25.6 17.0
4. k Mutual 0.06 0.04 0.54 2.37 30.56 11.0 6.24 - - - -
7 6 3
Fund 3
BOI AXA
- - 12.0
5. Mutual - - - - - - - 1.83 3.47 2.58 6.56
3.26 0.76 6
Fund
Birla Sun
- -
Life 31.0 11. 20.6 42.0 138.3 66.4 124. 75.0 86.5 172.1
6. 6.08 9.76 47.4 18.0
Mutual 8 15 7 3 1 4 92 3 1 5
6 7
Fund
BNP -
- - -
7. Paribus - - - - - - - - - 17.1 -7.54
3.69 0.49 3.12
MF 1
Baroda
12.8 - 13.7 -
8. Pioneer - - - - - - -0.38 5.56 3.31 3.01
8 5.20 7 15.65
MF
CRB - -
13.1 31.3 - -
9. Mutual - - - - - - 2.95 24.1 20.1 5.70
7 0 3.64 0.46
Fund 7 3
Deutsche - - -
1 16.7 31.8 - 27.6 46.8 -
Mutual - 3.13 2.9 6.49 35.75 23.8 16.5 6.46
0. 0 5 8.61 5 5 10.27
Fund 4 0 1
DSP - -
1 25.2 1.0 44.0 14.2 - 81.2 24.4
Blackrock 6.07 1.60 46.55 7.15 10.2 36.4 26.17
1. 2 5 9 5 2.03 4 1
MF * 1 7
Dundee
1 - -
Mutual - - - - - - - - - - - -
2. 0.96 0.22
Fund
Edelweiss
1 - - - -
Mutual - - - - - - 0.10 1.35 1.65 6.54
3. 15.77 0.10 1.29 0.44
Fund
Escorts -
1 - - - -
Mutual 0.47 0.0 0.11 - 0.61 0.70 0.16 0.03 9.33 12.42
4. 0.02 0.35 0.05 0.23
Fund 4
Fidelity -
1 24.3 14.1 -
Mutual - - - - 20.50 2.33 23.5 5.61 - - -
5. 9 3 9.65
Fund 5
1 First India 0.68 0.67 2.28 - - - - - - - - - - -

12
6. Mutual 1.5
Fund 2
Fortis -
1 8.4 15.5 20.4 -
Mutual - - - 17.81 13.7 - - - - -
7. 8 3 0 7.49
Funds 4
Franklin - - - -
1 23.0 11.4 47.1 43.3 57.7 35.2 43.5 100.4
Templeton 9.6 18.2 17.53 26.5 17.6 3.06
8. 2 7 9 4 6 6 6 0
MF 7 8 0 9
Goldman
1 Sachs 17.0 20.0
- - - - - - - - - 0.19 1.05 8.24
9. Mutual 3 1
Fund
HDFC - - -
2 37.1 21.2 46.5 33.3 71.4 157.8 74.4 113. 52.6 52.8 165.4
Mutual 0.5 25.9 114.
0. 7 2 8 5 0 9 0 58 7 2 3
Fund 5 1 72
HSBC - - -
2 35.7 12. 18.0 19.5 - 14.8
Mutual - 7.36 17.03 38.7 49.4 14.3 7.98 -2.82
1. 7 82 0 4 3.72 9
Fund 2 3 9
ICICI - - -
2 14.0 20.0 43.8 1.7 56.3 137. 121.3 103. 97.5 132. 242.2
Prudential 47.1 12.1 28.5
2. 5 1 5 0 5 85 8 72 6 64 4
MF 5 9 1
IDFC -
2 20.4 23.5 16.4 15.4 - - 66.0 - 15.3 64.1 34.1
Mutual 8.62 2.5 39.95
3. 0 9 6 7 15.77 0.61 3 7.47 6 8 0
Fund 7
IL&FS
2 12.9
Mutual 3.26 5.16 - - - - - - - - - 5.63 1.88
4. 8
Fund
ING - -
2 - -
Mutual 0.46 1.68 8.80 3.9 6.66 7.62 41.66 53.1 5.80 1.23 - -
5. 9.62 1.49
Fund 2 3
Jardine
2
Fleming 0.58 - - - - - - - - - - - - -
6.
MF
- - -
2 JM Mutual 11.7 12.9 3.8 13.9 - - -
9.66 14.6 4.53 86.19 49.0 35.9 51.00
7. Fund 7 0 6 5 0.45 2.76 0.66
5 3 0
JP Morgan -
2 - 13.2 72.2 -
Mutual - - - - - - 22.13 3.24 0.58 22.6
8. 3.12 1 8 13.69
Fund 5
Kotak - - -
2 19.1 10. 24.3 12.3 46.0 48.2
Mahindra 8.55 9.44 31.28 9.39 12.2 48.7 20.8 57.65
9. 5 66 2 8 2 6
MF 6 7 5
L&T -
3 - 12.4 55.2
Mutual - - - - - - - 5.87 12.0 6.46 -4.43
0. 8.53 6 7
Fund 8
3 Lotus - - - - - 11.6 56.46 - - - - - - -

13
1. Mutual 7
Fund
LIC - -
3 59.5 48.7 13.1 22.7 -
Mutual - - - - - - 21.78 169. 30.9
2. 4 1 2 2 10.45
Find 88 8
Mirae
-
3 Asset -
- - - - - - 11.89 12.2 0.70 1.10 0.61 1.53 6.45
3. Mutual 1.01
7
Fund
Morgan
3 - - - - - -
Stanley - - - - 0.67 2.41 - -
4. 0.24 0.28 0.15 3.72 4.24 2.89
MF
Peerless
3 - -
Mutual - - - - - - - - - - - -
5. 8.02 14.58
Fund
Pioneer
3 12.2
ITI Mutual - - - - - - - - - - - - -
6. 8
Fund
Pinbridge
3
Mutual - - - - - - - - - - - 3.92 - -
7.
Fund
Principal - - -
3 18.4 18. 28.6 - - -
Mutual - - 1.44 21.72 51.5 11.3 14.8 4.69
8. 1 95 2 8.73 3.24 4.00
Fund 5 4 7
Quantum
3
Mutual - - - - 0.11 0.46 -0.03 0.05 0.06 0.17 0.48 0.72 0.52 1.17
9.
Fund
Reliance - - -
4 13.0 39.6 18. 150. 225. 401.8 14.2 82.2 15.4 155.8
Capital 7.11 88.6 81.7 188.
0. 5 8 50 34 81 7 9 9 4 1
MF 3 8 04
4 Raligare 18.1 -
- - - - - - - - - - - 24.03
1. M.F. 2 2.46
Sahara
4 - - - -
Mutual - - - - 0.07 -0.14 0.13 5.96 7.14 -0.84
2. 1.11 6.54 7.18 0.60
Fund
SBI
4 26.1 54.3 42.4 44.9 63.4
Mutual - - - - - - 73.39 4.22 -1.53
3. 7 7 2 9 9
Fund
Shriram
4
Mutual - - - - - - - - - - - - 0.23 0.03
4.
Fund
Sun F&C
4
Mutual - - - - - - - - - - - - - -
5.
Fund
4 Sundaram 14.5 - 44.1 11.8 - 20.2
1.51 4.58 5.88 40.13 2.93 0.62 7.28 3.42
6. MF 6 1.8 8 8 13.2 8

14
 0 3
Tata - - - -
4 - 27.7 23. 13.7 22.9 28.7
Mutual 0.89 65.40 28.7 1.28 14.9 14.6 26.4 18.35
7. 0.17 2 88 9 1 9
Fund 2 0 4 4
Taurus -
4 - - - - 11.5 - - -
Mutual 0.4 0.31 -0.37 0.42 5.88 2.12
8. 0.07 0.14 0.03 0.43 5 5.21 2.97 7.44
Fund 5
UTI - - -
4 106.7 156. 39.3 -
Mutual - - - - - - 41.1 166. 31.7 4.01
9. 8 53 8 12.78
Fund 2 36 9
Union
5 KBC
- - - - - - - - - - - - 2.03 -2.59
0. MutualL
Fund
5
PPFAS - - - - - - - - - - - - 2.99 0.70
1.
5 PARAMI -
- - - - - - - - - - - - 0.40
2. ECIA 1.91
5
IIFCL - - - - - - - - - - - - 3.00 0.00
3.
-
5
IDBI - - - - - - - - - - - - 12.0 0.51
4.
1
5 INDIABU
- - - - - - - - - - - - 4.28 3.24
5. LLS
5 -
IIFL - - - - - - - - - - - - 1.12
6. 1.35
- - -
149. 121. 415. 80. 407. 793. 1586. 783. 735. 545. 1093.
Total 242. 486. 454.
84 57 63 71 06 30 74 51 67 80 77
05 00 14

Source: Handbook on Statistics on Indian Economy, Reserve Bank of India, 2015

Problems of Mutual Funds in India: An institutional setup of financial intermediaries is

required to mobilize the savings of the society and investing rationally for economic
development. Unit Trust of India was set-up by the Central Govt. under the UTI Act, 1963 with
an objective of mobilizing savings of middle and lower income groups and providing them
opportunities to acquire property in the form of shares. The growth of UTI took place during the
period when the economy was under a control regime and securities markets were irrelevant to
industrial growth as the financial intuitions were the major purveyors of long-term finance. The
economic liberalization and globalization created a fervent environment in our country and
several small investors participated in the equity of the corporate sector. The investors who
subscribed to equity shares issued at high premia, after abolition of the office of the Controller of
the Capital Issues, have lost their investments as the market prices of such shares are prevailing

15
at very low rates or not quoted at all. SEBI has raised the amount of minimum subscription in
public issues and shifted to compulsory trading of securities in dematerialized form through
depositories. The private sector mutual funds have benefited the investors by providing them
more options and better services. There are 56 mutual funds operating with a wide branch
network in our country. The present state of mutual funds, their performance, profitability and
decline of NAVs below issue prices have been causing concern to the investors.

The UTI Act governs UTI and the SEBI regulations are not applicable to UTI. A set of
common rules and regulations are required for the same business to provide level playing field.
In the absence of a single comprehensive legislation for mutual funds, there are several Acts
applicable to the business of mutual funds. UTI has followed ‘trust approach’ while SEBI-
regulated mutual funds have combined both trust and corporate approaches. The Indian Trusts
Act, 1882 does not contain adequate provisions to deal with a trust where there is a large-scale
mobilization of public funds/ savings for expert fund management to maximize the returns to the
investors. The management of funds has been entrusted to the assets management companies
incorporated under the Companies Act,1956 to separate management from ownership, control
and supervision. There are several parties to mutual funds such as sponsor, the trustees, the
AMC, the custodians and the investors as beneficiaries. The rights, duties and obligations of all
the parties need to be focused under a specific statute or Act rather than enforcing partly under
SEBI Act, The Companies Act and the Indian Trusts Act. All the problems of mutual fund
industry have been classified in the following categories:

Problems related to structure: The problems related to structure under SEBI (Mutual Funds)
Regulations,1996 are pertaining to regulations 2 (q), 7, 16 (5) , 24 (3) , 21 (b) , 24 (2) , 32, 33,43,
& 44. AMFI has taken a lead & made representations to the SEBI & the Central Govt. to amend
the regulations. The problems related to the Indian Trusts Act ,1882 are pertaining to
individual/collective liability. The post –SEBI mutual funds have opted for trustee company
structure. The liability of the trustees is more onerous under the board of trustees structure as
compared to the trustee company structure. The Indian Trusts Act does not permit perpetual
succession. The companies Act, 1956 permits perpetual succession but it can’t protect the
interest of the investors due to the privilege of limited liability. The Govt. of India should
consider enacting a separate comprehensive Mutual Funds Act and clearly spell out rights, duties
and obligations of the various constituents of mutual fund to provide a uniform regulatory
framework and to create a level playing field for all the mutual funds in the industry including
UTI.

Problems related to the investors: The success of a mutual fund depends upon the confidence
of the investors. UTI has established a marketing network of branches, chief representatives,
collection centers and franchise offices through out the country. The marketing network of UTI
is its unique strength as compared to other mutual funds. UTI could mobilize Rs.75159 Cr. of
investible funds through its 87 schemes due to its well established marketing network. All other
mutual funds could not establish such a marketing network and can’t compete with UTI in
16
mobilizing public savings from rural and semi-urban areas. All the problems related to the
investors are, lack of awareness and poor after sales service to the investors. The investors
believed, so far , that the mutual funds promoted by UTI, LIC, and nationalized banks are
guaranteed by the Central Govt. The majority of the new investors don’t understand the concept,
operations and advantages of investment in mutual funds before investing . The researcher had
undertaken surveys of individual investors and members of Ahmedabad Stock Exchange to
analyse the awareness of investors about the mutual fund schemes .It was observed that small
businessmen, farmers and persons belonging to rural and semi-urban areas in low income group
had no awareness about the mutual funds. The queries received from the investors are promptly
attended by all the private sector mutual funds. There are delays in attending queries by the
transfer agents in case of UTI due to large number of queries received by them.

Problems related to working: The inventible funds of the mutual funds increase when sales
are more than the redemptions and decrease when the redemptions are more than sales creating
the problems of maintaining liquidity The investors prefer to invest in equity funds during boom
period and shift their investments to debt funds during the recession period. The most profitable
and high income & appreciation potential stocks during the boom period or at the time of
investing funds in such stocks may become illiquid over a period of time .The investors can’t
take decisions of investment due to unavailability of track records of working. HDFC and
Standard Chartered Mutual Funds started their operations in 2000, all other mutual funds except
UTI have the track record of 3 to 5 years. Unless the track records of working of mutual funds is
available covering the several stock market booms and crashes, the investors can’t judge which
schemes or mutual funds are better alternatives for investments. There are several problems
related to UTI such as non-disclosure of portfolio, inter scheme transfer of funds, lack of
professional fund managers, sale & repurchase of units of US-64 at prices not related to its NAV,
bureaucratic working, etc. AMFI has constituted committees on valuation, best practices and
credit policy and working groups on valuation of gilt-securities, standardization of disclosure,
pensions, etc. to ensure uniform working and disclosure practices.

Problems related to performance: The investor prefers safety of the principal amount, regular
returns, long-term growth, income tax benefits, etc. The mutual fund schemes have been
designed based on the preferences of the investors, changes in stock/capital market, returns on
various instruments and changing profile of the investors. The schemes are framed and
conceptualized by the top management of the mutual funds and marketed by their branches and
through the agents. The agents and the sales executives of the mutual funds assure higher returns
to the investors and paint a rosy picture about the mutual funds while marketing schemes. The
mutual funds in our country have been quite wrongly promoted as an alternative to equity
investing and created very high expectations in the minds of the investors. The ignorance of the
investors about mutual funds coupled with aggressive selling by promising higher returns to the
investors have resulted into loss of investors’ confidence due to inability to provide higher
returns. All mutual funds set a higher target for mobilization of savings from the investor by

17
launching new schemes and expanding investor base. The agents or distributor of mutual funds
are more governed by commissions and incentives they get for selling the schemes and not by
the requirements of the investors and quality of the products. They share commissions with the
investors and don’t explain the risk factors to them.

The investors who invest in growth or equity schemes consider it as an alternative to stock
market investing and the investors who invest in debt schemes expect higher returns on their
investments than returns on nationalized banks’ fixed deposits. The investors expect higher
returns and get dissatisfied when they don’t receive the expected returns. The NAV of the mutual
fund scheme gets discounted on debiting the front-ended load of issue expenses after closure,
further discounted on listing and continue to decline on trading due to poor demand for such
units due to the poor sentiments of the investors. The mutual funds are bound to invest the funds
as per their investment objectives of each scheme published in the offer document. After the
issue is over, it becomes the mandate and the mutual funds have no choice to invest the funds in
other securities, which can provide higher returns.

IV. Conclusion

The economic development of a country largely influenced either by credit based financing
through financial institutions or by financial securities through capital market. Mutual Funds in
recent past as a channel of resource mobilization has gained immense importance in general and
in India in particular. India has much less exposure in the Mutual funds returns predictability
literature until recently. Given India’s fast-growing economic influence, research on this
dimension as compared Indian stock market still seems to be inadequate and needs further
investigation. The present study extends the existing literature. The mutual fund industry in India
started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of
India and Reserve Bank of India. The history of mutual funds in India can be broadly divided
into four distinct phases. The results from analysis suggests that resources mobilisation of UTI
seems to be very high in 2009-10 while period of 2007-08 evidences that Private Sector mutual
funds ranks top in the list of mutual fund mobilisation. A sharp decline in mobilization of funds
was seen in 2008-09 due to Global Financial Crisis. However, there is sharp increase in capital
mobilisation in 2007-08 as Rs. 1, 28,032 crore, significantly due to Private sector funds. All the
problems of mutual fund industry can be classified in the following categories: Problems related
to structure, Problems related to the investors, Problems related to working, Problems related to
performance. The mutual funds are bound to invest the funds as per their investment objectives
of each scheme published in the offer document. After the issue is over, it becomes the mandate
and the mutual funds have no choice to invest the funds in other securities, which can provide
higher returns. The greater transparency, increased innovations, better services to the investors,
liquidity and higher returns will make mutual fund schemes more popular and investors friendly.

18
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