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The ¬
  industry started in India in a small way with the UTI Act creating what was
effectively a small savings division within the RBI. Over a period of 25 years this grew fairly
successfully and gave 

  a good return, and therefore in 1989, as the next logical step,
public sector banks and financial institutions were allowed to float ¬
   and their
success emboldened

 
¬

to allow the private sector to foray into this area. The
initial years of

 
 also saw the emerging years of the Indian equity market, when a
number of mistakes were made and hence the mutual fund schemes, which invested in lesser-
known stocks and at very high levels, became loss leaders for retail investors. From those days to
today the



 , for whom the mutual fund is actually intended, has not yet returned to
the industry in a big way. But to be fair, the industry too has focused on bringing in the large
investor, so that it can create a significant base corpus, which can make the retail investor feel
more secure.

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 the. The history of mutual funds in India
can be broadly divided into four distinct phases.

The history of mutual funds in India can be broadly divided into distinct phases.

£    c

ü UTI sole player in the industry, created by an £



ü The first product launched by UTI was Unit Scheme 1964

ü UTI creates products such as ULIP (1971), MIP¶s, Children Plans (1986), Offshore Funds etc.

ü  !
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ü INDIA Fund ± 1st Indian offshore fund launched in August 1986.

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ü In 1987 Public Sector Banks and FI¶s got permission to set up MF.

ü SBI mutual fund was the first non -UTI mutual fund, set up in November 1987

ü This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC and PNB MF

ü In 1993, Mutual Fund Industry was open to private players.

ü SEBI got its regulatory powers in 1992

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ü In 1993, Mutual Fund Industry was open to private players.

ü SEBI¶s first set of regulations for the industry formulated in 1993

ü Significant innovations, mostly initiated by private players

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ü Implementation of new SEBI regulations led to rapid growth

ü Bank mutual funds were recast as per SEBI guidelines

ü UTI came under voluntary SEBI supervision.

ü Dividends made tax free in 1999.

ü Mutual funds assets in mid-2002 were app. 1,00,000 crore

ü During this phase, both SEBI and AMFI launched investor awareness programmes.

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ü AUM by end of 2005 app. INR 1,50,000 crore

ü Rapid growth, significant increase in corpus of private players

ü Tax break offered created arbitrage opportunities

ü Bond funds and liquid funds registered highest growth

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ü Mergers and m

 witnessed

ü Alliance MF acquired by Birla Sunlife

ü Sun F&C by Principal PNB Mutual fund

ü Standard Chartered acquired by IDFC

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The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps
the smallest segment of the industry, it is also the most glamorous ± in that it is a young industry
where there are changes in the rules of the game everyday, and there are constant shifts and
upheavals.

The mutual fund is structured around a fairly simple concept, the mitigation of risk through the
spreading of investments across multiple entities, which is achieved by the pooling of a number
of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate
and prolonged regulatory effort in the history of the country.

The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and
financial markets. The mutual fund industry in India has seen dramatic improvements in quantity
as well as quality of product and service offerings in recent years. Mutual funds assets under
management grew by 96% between the end of 1997 and June 2003 and as a result it rose from
8% of GDP to 15%.
The industry has grown in size and manages total assets of more than $30351 million. Of the
various sectors, the private sector accounts for nearly 91% of the resources mobilized showing
their overwhelming dominance in the market. Individuals constitute 98.04% of the total number
of investors and contribute US $12062 million, which is 55.16% of the net assets under
management.

Steady growth of mutual fund business in India in the four decades from 1964, when UTI was set
up is given in the table on the next page:

---

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1964-69 65 1992-93 46988.02
1969-74 172 1993-94 61301.21
1974-79 402 1994-95 75050.21
1979-84 1261 1995-96 81026.52
1986-87 4563.68 1996-97 80539.00
1987-88 6738.81 1997-98 68984.00
1988-89 13455.65 1998-99 63472.00
1989-90 19110.92 1999-00 107966.10
1990-91 23060.45 2000-01 90587.00
1991-92 37480.20 2001-02 94571.00

Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitive
functioning with the dedicated goal of service to the investors can be said to have settled in India
only in 1993. However the industry took its roots much earlier with the setting up of the Unit
Trust in India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has
grown to be a dominant player in the industry with assets of over Rs.72, 333.43 Crores as on
March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963.
In 1987 public sector banks and insurance companies were permitted to set up mutual funds and
accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance
companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI)
formulated the Mutual Fund (Regulation) 1993, which for the first time established a
comprehensive regulatory framework for the mutual fund industry. Since then several mutual
funds have been set up by the private and joint sectors.

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A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. |
¬
 thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. Thus, a Mutual Fund is the most suitable investment for the ¬¬¬ as it
offers an opportunity


 a diversified, professionally managed basket of securities at a
relatively low cost.

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´Mutual funds are {
{ 
{ %! where savings of small (or
sometimes big) investors are pooled together to invest for their mutual benefit and returns
distributed proportionately´. Pooling of money ensures that small investors get the benefit of
advice and expertise that is normally available only to very large investors.

´A mutual fund is an ! that pools your money with the money of an unlimited number
of other investors. In return, you and the other investors each own shares of the fund. The fund¶s
assets are invested according to an investment objective into the fund¶s portfolio of investments.

Aggressive  
  seek long-term capital growth by investing primarily in stocks of fast-
growing smaller companies or market segments. Aggressive growth funds are also called 
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´Mutual Funds are investment companies that make investments on behalf of individuals and
institutions that share 

-
!. The suitability of a particular mutual fund for an
individual investor depends on the type and nature of the fund¶s investments and amount of
diversification.

Funds are rated widely as to risk and return, and such ratings can be used to establish a match
with investor goals and suitability´.

´Mutual Funds schemes are managed by respective Asset Management Companies sponsored by
financial institutions, banks, private companies or international firms. The biggest Indian AMC
is UTI while Alliance, Franklin Templeton etc are international AMC¶s.

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A µsponsor¶ is any person who, acting alone or in combination with another body corporate,
establishes a MF. The sponsor of a fund is similar to the promoter of a company. In accordance
with SEBI Regulations, the sponsor forms a trust and appoints a Board of Trustees, and µalso
generally appoints an AMC as fund manager. In addition, the sponsor also appoints a custodian
to hold the fund assets. The sponsor must contribute at least 40% of the net worth of the AMC
and possess a sound financial track record over five years prior to registration.

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The MF or trust can either be managed by the Board of Trustees, which is a body of individuals,
or by a Trust Company, which is a corporate body. Most of the funds in India are managed by
Board of Trustees. The trustees being the primary; guardians of the unit holders¶ funds and
assets, a trustee has to be a person of high repute and integrity. The trustees, however, do not
directly manage the portfolio securities. The portfolio is managed by the AMC as per the defined
objectives, accordance with Trust Deed and SEBI (Mutual Funds) Regulations.

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The AMC, which is appointed by the sponsor or the trustees and approved by SEBI, acts like the
investment manager of the trust. The AMC functions under the supervision of its own Board of
Directors, and also under the direction of the trustees and SEBI. AMC, in the name of the trust,
floats and manages the different investment µschemes¶ as per the SEBI Regulations and as per
the Investment Management Agreement signed with the Trustees.

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Apart from these, the MF has some other fund constituents, such as #! 
!
 
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  !2#!. The custodian is appointed for safe
keeping of securities and participating in the clearing system through approved depository. The
bankers handle the financial dealings of the fund. Transfer agents a responsible for issue and
redemption of units of MF. AMCs appoint distributors of brokers who sell units on behalf of the
Fund, and also serve as investment advisers. Besides brokers, independent individuals are also
appointed as µagents¶ for the purpose of selling fund schemes to investors. The regulations
require arm¶s length relationship between the fund sponsors, trustees, custodians and AMC.

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©? In an open ended fund, investors can buy and sell units of the fund, at NAV related
prices, at any time, directly from the fund.
©? Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial
offer period. After a pre-specified period say 30 days, the fund is declared open for
further sales and repurchases
 ©? Investors receive account statements of their holdings,
©? The number of outstanding units goes up and down
©? The unit capital is not fixed but variable.

2
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©? A closed -end fund is open for sale to investors for a specified period, after which further
sales are closed.
©? Any further transactions happen in the secondary market (stock exchange) where closed-
end funds are listed.
©? The price at which the units are sold or redeemed depends on the market prices, which
are fundamentally linked to the NAV.
©? The number of units of closed ended funds remains unchanged.
©? The unit capital is fixed because of one time sale.

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©? Load is the one time fee payable by the investor to allow the fund to meet initial issue
expenses including brokers/agents¶/distributors¶ commissions, advertising and marketing
expenses.

©? Funds that charge front end (entry) load, back end (exit), or deferred loads are called
LOAD funds.

©? IF the investors¶ objective is to get the benefit of compounding his initial investment by
reinvesting and holding his investment for a very long term, then, a no front load fund is
preferable.

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©? [hen a fund invests in tax exempt securities, it is called a tax exempt fund.

©? In India any income received by mutual fund is tax free.

©? After 1999 budget, all dividend income received from MF is tax free in hands of the
investor. But all funds other than open ended equity funds have to pay a dividend
distribution tax.

©? So in India, open end equity oriented mutual fund schemes are tax exempt Investment
Avenue, while other funds are taxable for distributable income.
©? After 2005 budget, repurchase transaction for equity oriented schemes are subject to
Securities Transaction Tax.


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Those funds which invest only in equity shares and undertake the associated risk;

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Those funds which invest in securities which will earn high income;

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Those funds which invest in growth oriented securities so as to assure appreciation in their value
in the long run;

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Those funds which specialize in investing in short- term money market instruments with
emphasis on liquidity with a low rate of return;

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Those funds which invest only in specialized channels like (a) gold and silver, (b) a specific
country (Japan Fund, India Fund, etc.), (c) a specific category of companies (Technology Fund);

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Those funds which invest only in those shares which are included in the market indices and in
the same proportion. They move with the market index;

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Leveraged funds are those which increase the size of the value of the portfolio and benefit the
shareholders by gains exceeding the cost of the borrowed funds;

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Such funds are meant for the real estate ventures.

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Those which divide their investments between equity shares and bonds in order to meet the
objectives of safety, growth, and regularity of income;

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Funds that buy shares whose prices are likely to go up and sell short, shares whose prices are
expected to go down; and finally.

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These specialize in investing in foreign companies.

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The share ice of the mutual fund is based on its net asset value (NAV) per share, which is found
by subtracting from the market value of the portfolio the mutual fun liabilities and the dividing
by the number of mutual fund shares issued.

That is:
In August 1994, SEBI had formed a six-member committee to suggest disclosure practices and
standardized procedures for computation of net asset values for mutual fund schemes. The
committee finalized its report on 12 December 1995 and the same was released on 1 January
1996.

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©? SEBI ( Established in 1992 by an Act of Parliament)?

©? Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996
©? SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign
country
©? Bank-sponsored mutual funds were jointly regulated by SEBI and RBI
©? Subsequently it has been clarified that all MFs being primarily capital market players,
come under the regulatory umbrella of SEBI.
©? RBI regulates the money and government securities market where the mutual funds
invest but the not the MMMF.
©? Liquid funds which invest in money market instruments are now governed by SEBI
alone. ( Money Market Mutual Funds are now regulated by SEBI)?
©? If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission
©? All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under
purview of the SEBI
©? SEBI regulates Share Registrars, Custodians, Mutual Funds, Stock Exchanges and share
brokers. But it does not regulate Non Banking Finance companies.

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©? The finance ministry is the supervisor of both the RBI and SEBI

©? Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual
funds

©? AMCs has to file its annual statements with Registrar of Companies ( RoC)

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AMFI is an industry association, incorporated in 1995, is not an SRO, so it can just issue
guidelines to members. It cannot enforce regulations.

25!

©? To promote the interests of mutual funds and unit holders.

©? To set ethical, commercial and professional standards in the industry.

©? To increase public awareness of the mutual fund industry.

 ©? To develop a cadre of well trained distributors

AMFI is governed by a board of directors elected from?mutual funds and is headed by a full time
chairman.

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©? Investors are entitled to receive dividends declared in a scheme within 30 days.

©? Redemption proceeds have to be sent to investors within 10 days
©? If an investor fails to claim the dividend or redemption proceeds he has the rights to claim
it up to a period of 3 years from the due date at the then prevailing NAV. After 3 years he
will be paid at NAV applicable at the end of 3rd year.
©? Mutual funds have to allot units within 30 days of the closure of the issue and also open
the scheme for redemption, if it is an open -ended scheme.
©? Mutual funds have to publish their half yearly results in at least one national daily and
publish their entire portfolios, at least once in 6 months. Such disclosure should be done
within 30 days from 6 monthly account closing dates of the fund
©? Trustees will have to ensure that any information having a material impact on the unit
holders investments should be made public by the mutual fund
©? If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of unit
holders can be called 3)Appointment of the AMC of the mutual fund can be terminated
©? If there is any change in the fundamental attributes of the scheme, the unit holders have
to be notified through a letter. They also have a right to repurchase at NAV without any
load, before such change is effected.
©? Unit holders have the right to inspect certain documents
©? Unit holders have the right to receive the complete statement of the scheme
©? Portfolio before the expiry of one month from the close of each half year.

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©? Investors cannot sue the trust as they are not distinct from the trust
©? Investors cannot lodge complaints against the trustees (with the Registrar of Public
Trusts) or the AMC (with the CLB).
©? Investors can lodge complaints with SEBI for non-compliance.
©? Investors cannot be compensated if the performance of the fund is below expectations.
©? There are no legal remedies for to a prospective investor. Only after his investment in the
scheme he becomes eligible for the earlier mentioned right.

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SEBI regulations clearly state that all funds and schemes operational under them would be bound
by their regulations. SEBI has recently taken following steps for the regulation of mutual funds:

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Certain structural changes have also been made in the mutual fund industry, as part of which,
mutual funds are required to set up asset management companies with fifty percent independent
directors, separate board of trustee companies, consisting of a minimum fifty percent of
independent trustees and to appoint independent custodians. This is to ensure an arm¶s length
relationship between trustees, fund managers and custodians, and is in contrast with the situation
prevailing earlier in which all three functions were often performed by one body which was
usually the sponsor of the fund or a subsidiary of the sponsor .

Thus, the process of forming and floating mutual funds has been made a tripartite exercise by
authorities. The trustees, the asset management companies (AMCs) and the mutual fund
shareholders form the three legs. SEBI guidelines provide for the trustees to maintain an arm¶s
length relationship with the AMCs and do all those things that would secure the right of
investors.

[ith funds being managed by AMCs and custody of assets remaining with trustees, an element
of counter-balancing of risks exists as both can keep tabs on each other.

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In January 1993, SEBI prescribed registration of mutual funds taking into account track record of
a sponsor, integrity in business transactions and financial soundness while granting permission.
This will curb excessive growth of the mutual funds and protect investor¶s interest by registering
only the sound promoters with a proven track record and financial strength. In February 1993,
SEBI cleared six private sect9r mutual funds viz. 20th Century Finance Corporation, Industrial
Credit& Investment Corporation of India, Tata Sons, Credit Capital Finance Corporation, Ceat
Financial Services and Apple Industries.

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The offer documents of schemes launched by mutual funds and the scheme particulars are
required to be vetted by SEBI. A standard format for mutual fund prospectuses is being
formulated.

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Mutual funds have been required to adhere to a code of advertisement.

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SEBI has introduced a change in the Securities Control and Regulations Act governing the
mutual funds. Now the mutual funds were prevented from giving any assurance on the land of
returns they would be providing. However, under pressure from the mutual funds, SEBI revised
the guidelines allowing assurances on return subject to certain conditions. Hence, only those
mutual funds which have been in the market for at least live years are allowed to assure a
maximum return of 12 per cent only, for one year. [ith this, SEBI, by default, allowed public
sector mutual funds an advantage against the newly set up private mutual funds.
As per basic tenets of investment, it can be justifiably argued that investments in the capital
market carried a certain amount of risk, and any investor investing in the markets with an aim of
making profit from capital appreciation, or otherwise, should also be prepared to bear the risks of
loss.

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The current SEBI guidelines on mutual funds prescribe a minimum s art-up corpus of Rs.50
crore for a open-ended scheme, and Rs.20 crore corpus r closed-ended scheme, failing which
application money has to be refunded.

The idea behind forwarding such a proposal to SEBI is that in the past, the minimum corpus
requirements have forced AMCs to solicit funds from corporate bodies, thus, reducing mutual
funds into quasi-portfolio management outfits. In fact, the Association¶ of Mutual Funds in India
(AMFI) has repeatedly appealed to the regulatory authorities for scrapping the minimum corpus
requirements.

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The efforts of SEBI have, in the last few years, been to institutionalize the market by introducing
proportionate allotment and increasing the minimum deposit amount to Rs.5000 etc. These
efforts are to channel the investment of individual investors into the mutual funds.

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In November 1992, SEBI increased the time limit from six months to nine months within which
the mutual funds have to invest resources raised from the latest tax saving schemes. The
guideline was issued to protect the mutual funds from the disadvantage of investing funds in the
bullish market at very high prices and suffering from poor NA V thereafter.

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SEBI guidelines say that mutual funds can invest a maximum of 25 per cent of resources
mobilized into money-market instruments in the first six months after closing the funds and a
maximum of 15 per cent of the corpus after six months to meet short term liquidity requirements.
Private sector mutual funds, for the first time, were allowed to invest in the call money market
after this year¶s budget.

As SEBI regulations limit their exposure to money markets, mutual funds are not major players
in the call money market. Thus, mutual funds do not have a significant impact on the call money
market. SEBI also conclude that mutual funds were not responsible for the unprecedented
shooting up of call money rates.

Some funds exceeded their limits in an effort to improve their sagging net asset values
(NAVs).Usually, funds can early only about 9-12 per cent. Thus, the prospect of earning more
than 40 per cent may have been tempting,
 1.? 1
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SEBI should work in tandem with the Institute of Chartered Accountants of India (ICAI) to take
up a fresh look at mutual fund regulations enacted in 1993. The valuation of investments, a key
aspect of fund accounting, as on balance sheet date, needs review, SEBI regulations 1993, give
discretionary powers to the fund managers as far as the valuation of the investment portfolio on
the balance sheet date is concerned, There are no accounting standards or guidelines prescribed
by the ICAI for the valuation of a mutual fund¶s investment portfolio.

The mutual funds are clearly taking advantage of this situation and valuing the portfolio at cost
of acquisition. The subsequent depreciation or appreciations in the investment portfolio are not
accounted for. Thus, the mutual funds may be able to show profits in the balance sheet even if
there is severe erosion in the value of the investment portfolio. This erosion in the values of the
investment portfolios is clearly seen in the net asset values (NA V) as on the balance sheet date.
But the accounts of the mutual funds do not reveal the same.

The objective of the accounting in case of a mutual fund should be besides showing details of
income, expenses, assets and liabilities, has to reveal the true value of the fund. The value of the
fund is already reflected in, its NAV and the balance sheet is expected to be in consonance with
this value. This requires that the investment portfolio be calculated at market values, providing
for any depreciation or appreciation. .

The transparent and well understood declaration or Net Asset Values (NAVs) of mutual fund
schemes is an important issue in providing investors with information as to the performance of
the fund. SEBI had warned some mutual funds earlier of unhealthy market practices, and is
currently working on a common format for calculating the net asset values (NAVs) of mutual
funds, which are done in various ways by them at present.

1.? 1c
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SEBI inspect mutual funds every year. A full SEBI inspection of all f the 27 mutual funds were
proposed to be done by the March 1996 to streamline their operations and protect the investor¶s
interests. Mutual funds are monitored and inspected by SEBI to ensure compliance with the
regulations.

1.? 1cc

cc 

In July 1994, SEBI permitted mutual funds to take up underwriting of primary issues as apart of
their investment activity. This step may assist the mutual funds in diversifying the business.

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In September 1994, it was clarified by SEBI that mutual funds shall not offer buy back schemes
or assured returns to corporate investors. The Regulations governing Mutual Funds and Portfolio
Managers ensure transparency in their functioning.
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In September 1993, mutual funds were allowed to exercise their voting rights. Department of
Company Affairs has reportedly granted mutual funds the right to vote as full-fledged
shareholders in companies where they have equity investments.

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Mutual funds le households an option for portfolio diversification and relative risk-aversion
through collection of funds from the households and make investments in the stock and debt
markets. Resources mobilized by mutual fund (UTI was the only mutual fund until 1987-88)
grew at a steady rate until 1992-93; since then they showed some variations. Resources
mobilized by a mutual fund which was just 0.04 per cent of GDP (at current market prices)
during the period of 1970-71 to 1974-85 increased to 1.59 per cent during 1990-91 to 1992-93.
Total resources mobilized as proportion of GDP declined to 1.12 per cent by 1994-95 but
nevertheless remained positive. During the period from 1995-97, there was a net outflow of
funds form mutual funds, especially UTI, as a result of which the ratio turned negative. From
1997-98 onwards, the ratio again turned positive and stood at 1.13 per cent during 1999-2000.

The mutual fund industry registered significant growth in the last few years. The ingestible
resources of mutual funds rose form Rs. 68,200 crore in 1998-99 to Rs. 1, 09,114 crore in 1999-
2000. Net resource mobilization by mutual funds declined to Rs. 6,846 crore in April-December,
2000 from Rs. 12,193 crore in the corresponding previous period. This was on account of the
steep increase in redemption/repurchase during this period. The outflow of funds via
repurchase/redemption constituted 88.7 per cent of gross resource mobilisation during April-
December, 2000 compared with 66.0 per cent in the corresponding previous period. In the case
of public sector mutual funds, redemption/repurchase exceeded gross resource mobilization,
thereby making their net resource mobilization negative.

.
. ##
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A Mutual Fund is the most suitable investment for the common man as it offers an opportunity to
invest in a diversified, professionally managed basket of securities at a relatively low cost. India
has a burgeoning population of middle class now estimated around 300 million. A typical Indian
middle class family can have liquid savings ranging from Rs.2 to Rs.10 Lacs today. Investments
in Banks are liquid and safe, but with the falling rate of interest offered by Banks on Deposits, it
is no longer attractive. At best a part can be saved in bank deposits, but what are the other
sources of investment for the common man? Mutual Fund is the ready answer. Viewed in this
sense globally India is one of the best markets for Mutual Fund Business, so also for Insurance
business. This is the reason that foreign companies compete with one another in setting up
insurance and mutual fund business units in India. The sheer magnitude of the population of
educated white collar employees provides unlimited scope for development of Mutual Fund
Business in India.

The alternative to mutual fund is direct investment by the investor in equities and bonds or
corporate deposits. All investments whether in shares, debentures or deposits involve risk. [hile
risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reduce
risk through diversification and professional management. The experience and expertise of
Mutual Fund managers in selecting fundamentally sound securities and timing their purchases
and sales help them to build a diversified portfolio that minimizes risk and maximizes returns