Evolution & Growth of Mutual Funds

Evolution of Mutual Funds

Origins (1770s):

• Adriaan Van Ketwich:
  • A Dutch merchant who is credited with creating the first mutual fund in 1774.
  • He launched the fund “Eendragt Maakt Magt,” which translates to “Unity Creates Strength.”
  • This fund pooled money from multiple investors to invest in a diversified portfolio of bonds.
  • The concept aimed to provide investors with diversification and risk reduction by spreading their investments across various securities.
• Expansion to Other Regions:
  • The idea of mutual funds spread from the Netherlands to England and France.
  • By the 1890s, the concept had made its way to the United States, marking the beginning of the modern mutual fund industry.

Indian Mutual Fund Industry:

• Phase I (1964 – 1987): UTI Dominance
  • 1963: The Indian mutual fund industry began with the formation of the Unit Trust of India (UTI).
    • Initiated by the Government of India (GOI) and the Reserve Bank of India (RBI).
  • 1964: UTI launched its first major product, Unit64, with an initial capital of Rs. 5 crore.
    • This scheme was highly successful and attracted a large number of investors.
  • 1978: UTI was de-linked from the RBI, and the Industrial Development Bank of India (IDBI) took over its operations.
    • This transition led to the introduction of open-ended growth funds, which allowed investors to buy and sell units at any time.
  • 1988: By this time, UTI’s Assets Under Management (AUM) had grown to Rs. 6,700 crores, reflecting significant growth and investor confidence.
• Phase II (1987 – 1993): Entry of Public Sector Mutual Funds
  • 1987: The mutual fund industry saw the entry of non-UTI, public sector mutual funds.
    • The State Bank of India (SBI) launched its mutual fund in June 1987, followed by Canara Bank Mutual Fund in December 1987.
  • 1993: The industry’s AUM had reached Rs. 47,004 crores, indicating the growing popularity of mutual funds among Indian investors.
• Phase III (1993 – 2003): Private Sector Entry
  • 1993-94: This period marked the entry of private sector players in the mutual fund industry.
    • Notable entrants included Kothari Pioneer Mutual Fund, ICICI Mutual Fund, and others.
  • 1995-96: The industry faced a downturn due to poor performance of some public sector funds and failures of foreign funds like Morgan Stanley.
  • 2003: By the end of January 2003, there were 33 mutual funds with total assets worth Rs. 1,21,805 crores. The entry of private players had diversified the market and increased competition.
• Phase IV (Since 2003): UTI’s Restructuring and Industry Mergers
  • 2003: UTI underwent restructuring.
    • The organization was bifurcated into two entities:
      • Specified Undertaking of the Unit Trust of India (SUUTI): Managed the assets of certain older schemes.
      • UTI Mutual Fund: Sponsored by major banks and insurance companies such as SBI, PNB, BOB, and LIC.
  • 2004: The mutual fund industry saw a wave of mergers and acquisitions.
    • Examples include Birla Sun Life’s acquisition of Alliance Mutual Fund, and Principal Mutual Fund’s acquisition of Sun F&C Mutual Fund and PNB Mutual Fund.

Key Points:

• Historical Roots: The concept of mutual funds dates back to the 18th century in Europe, with significant developments in the U.S. in the late 19th century.
• Early Indian Industry: Initiated by UTI, which played a dominant role in the early years of mutual funds in India.
• Growth and Diversification: The entry of public sector and private sector players in India expanded the industry significantly.
• Modernization and Consolidation: Recent years have seen restructuring and consolidation to improve efficiency and service in the mutual fund industry.

This detailed overview covers the historical development and evolution of mutual funds, highlighting key phases and milestones in the industry’s growth.