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Growth and performance of Indian mutual funds industry

Article in Journal of Economic & Financial Studies · April 2017

DOI: 10.18533/jefs.v5i02.251

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

Journal of Economic & Financial Studies, 05(02), 26-38

Vol. 05, No. 02: April (2017)

Journal of Economic & Financial Studies

Open access available at http://journalofeconomics.org

Growth and performance of Indian mutual funds industry

Bilal Ahmad Pandowa*

a Research Scholar, Department of Business and Financial Studies, University of Kashmir.
*Corresponding author’s email address: [email protected]

ARTICLE INFO ABSTRACT

Received: 26-08-2016 The Indian mutual fund industry has come a long way since its inception in 1963. The
Revised received: 16-11-2016 industry witnessed sufficient growth on all parameters - the number of fund houses, the
Accepted: 11-03-2017 number of schemes, funds mobilized, assets under management, etc. Given the critical
Available online: 15-04-2017 role of channeling household savings, the question is - has the Indian mutual industry
succeeded in achieving its’ goal? This study addresses this concern. The detailed nature
Keywords: of the current study suggests that the mutual fund industry has recorded significant
Economic growth; progress on all fronts yet it has not been able to utilize its potential fully. On almost on
Emerging market; all parameters, it is far behind the developed economies and even most of the emerging
Mutual fund. economies of the world. Moreover, the industry faces a number of challenges like low
penetration ratio, lack of product differentiation, lack of investor awareness and ability
JEL Classification : to communicate value to customers, lack of interest of retail investors towards mutual
G23; G30; G32. funds and evolving nature of the industry. Based on the analysis the study suggests some
recommendation to address these challenges.
© 2017 The Authors. This is an open access article under the terms of the Creative Commons Attribution License 4.0, which
allows use, distribution and reproduction in any medium, provided the original work is properly cited.
DOI: http://dx.doi.org/10.18533/jefs.v5i02.251 ISSN 2379-9463(Print), ISSN 2379-9471(Online)

1. Introduction

With the increasing emphasis on domestic savings and their mobilization and allocation towards profitable
investments, the need and scope of mutual fund operations have increased. It is an alternative vehicle of
intermediation between the suppliers and users of investable financial resources which are becoming increasingly
popular in India and aboard due to higher investor return and relativity low risk and cost. Thus the involvement
of mutual funds in the transformation of Indian economy has made it urgent to view their services not only as a
financial intermediary but also as pace settlers as they are playing a role in mobilizing and efficient allocation of
investable funds through markets. The fact is that the mutual funds have a lot of potentials to grow but to capitalize
the potential fully, it would need to create and market innovative products and frame clear marketing strategies.
Moreover, the equity culture has not yet developed fully in the country as such, investor education would be
equally important for greater penetration of mutual funds.

The history of mutual funds dates back to 19th century with its origin to Great Britain. Robert Fileming set-up in
1868 the first investment trust under the title ‘Foreign and Colonial Investment Trust’ to manage the finances of
moneyed classes of Scotland by spreading the investment and other investment trusts which were subsequently
set-up in Britain and the US, resembled today’s close-ended mutual fund schemes. The first mutual fund in the US
namely, Massachusetts Investors’ Trusts, was set up in 1924. In India, the mutual fund industry started in 1963.
However, its history has been divided into four phases.

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

1.1 Phase I (1964-87)

This phase started with setting up of Unit Trust of India (UTI), the first mutual fund set up in the public sector
under the UTI Act 1963, which launched its first unit scheme in 1964 namely US-64 with a major objective of
mobilizing savings through the sale of units and investing them in corporate securities for maximizing yields and
capital appreciation. It was the first open-ended scheme and the most popular scheme in the history of mutual
funds in India. UTI’s investible funds, at market value, grew from INR 49 crore in 1965 to INR 219 crore in 1970-
71 to INR 1,126 crores in 1980-81 and further to INR 5,068 crores in 1987. Its investor base as on 1987 had grown
to about two million investors. In 1986 it launched its first equity growth fund which proved to be a grand
marketing success. In the same year, it had also launched Indian Fund- the first Indian offshore fund for overseas
investors, which was listed on the London Stock Exchange (LSE). Being the only mutual fund till 1987, UTI enjoyed
a monopoly in the market and had experienced a consistent growth during this phase.

1.2 Phase II (1987-92)

The second phase witnessed the entry of other mutual funds sponsored by nationalized banks and insurance
companies. In 1987, State Bank of India (SBI) and Canara Bank set up SBI mutual fund and Canara Bank mutual
fund under the Indian Trust Act, 1882. In 1988, UTI floated another offshore fund namely, The India Growth Fund
which was listed on the New York Stock Exchange (NYSE). By 1990, the two nationalized insurance companies-
LIC & GIC and three nationalized banks namely, Indian Bank, Bank of India, and Punjab National Bank (PNB) have
established wholly owned mutual fund subsidiaries. In October 1989, the first regulatory guidelines were issued
by RBI, but these were applicable only to the mutual funds sponsored by banks. Subsequently, the government of
India issued comprehensive guidelines in 1990 which applies to all mutual funds. With the entry of public sector
funds during this phase, there was a tremendous growth in the size of mutual fund industry with investible funds
at market value, increasing to INR 53,462 crores and the number of investors had increased to over 23 million.
The buoyant equity markets in 1991-92 and the tax benefit under equity linked saving schemes enhanced the
attractiveness of equity funds during the Phase II.

1.3 Phase III (1992-97)

In this phase, two significant developments have taken place in the Indian mutual fund industry. One that the
mutual funds were brought under the ambit of SEBI which issued Mutual Fund regulations in 1993 bringing all
funds except UTI under a common regulatory framework. Another development was the permission granted to
private domestic and foreign players to launch funds. Consequently Kothari group of companies, in a joint venture
with Pioneer, a US fund company, set up the first private mutual fund in 1993 under the title ‘Kothari Pioneer’
Mutual Fund. Several other private sector mutual funds were set up during this phase. UTI launched a new scheme
namely: Master-gain in 1992 which was a phenomenal success with a subscription of INR 4,700 crore from 63
lakh applicants. With the opening up of mutual fund industry to private sector including foreign players, the
industry’s investible funds at market value increased to INR 78,655 crore, and the number of investors rose to 50
million. However, during 1995 and 1996, the mutual fund industry witnessed a decline. During these two years,
the unit holders suffered from erosion in the value of their investments due to a decrease in the Net Asset Values
(NAVs) of the equity funds. A lack of performance of the Public Sector Undertakings (PSU) funds and miserable
failure of foreign funds like Morgan Stanley eroded the confidence of investors in fund managers and their
perception about mutual funds turned negative. As a result of this, the average annual sales of mutual funds
declined from about INR 13,000 crores in 1919-94 to about INR 9,000 crore in 1995 and 1996.

1.4 Phase IV (1997 onwards)

This phase was characterized by a more positive sentiment in the capital market, tax benefits to the investments
in funds and improved quality of investor services by the mutual funds. As a result, there has been a significant
growth in the flow of funds into the mutual funds. Investable funds, at the market value of the industry, rose to
INR 1,10,000 crore in 2000 with UTI having 68 percent of market share. However, the UTI dropped a bombshell
in 2000-01 on the investing public by disclosing the NAV of US-64 just at INR 5.81 as against the face value of INR
10.00 per unit which reversed the growing trend of fund flows towards the mutual fund industry. In fact, this was
the biggest shock of the year to the investors. Coupled with this, the crumbling global equity markets, a sluggish
economy combined with some bad investment decisions made life tough for significant funds across the world in
2001-02. The consequences of this were also felt strongly in India as well. Owing to this, Pioneer ITI, JP Morgan,
and Newton Investment Management pulled out of Indian market and Bank of India Mutual Fund liquidated all its
assets in 2002. Moreover, due to the growing competition both from Public and Private sector MFs and
consequently upon the debacle of US-64, UTI lost most of its market share to other funds.

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

Post-2004, the industry witnessed several mergers and acquisitions. Besides many more international fund
players have entered India like Fidelity, Franklin Templeton mutual fund, etc. These developments and the
positive sentiment in the equity market since 2005 to 2008 have taken the mutual fund industry out of stagnation.

2. Growth and development of mutual funds in India

The Mutual fund's industry that started its journey in the country in 1963 has turned as one of the important
constituents of the financial sector. The industry has witnessed sufficient expansion and standardization in terms
of products and services offered, regulatory mechanism, and the proliferation of a large number of private sector
funds both domestic and foreign. The fact is that the fund market in the country has graduated from offering plain
vanilla equity and debt funds to an array of diverse products such as Gold Funds (GF), Exchange Traded Funds
(ETFs), and capital protection oriented funds and even the native funds (Fozia, 2013). Truly, the mutual fund
industry in the country has come from a long way, but the moot question is that whether it has realized its
potential fully. In order to answer this question, we would need to analyze its growth critically. For this purpose
in the following para’s the growth that the mutual fund's industry has achieved over a period of time of time has
been analyzed in respect of the following parameters: (a) number of funds, (b) fund schemes offered; (c)
mobilization of funds; (d) assets under management; (e) household savings mobilized; and (f) performance of
AMCs in terms of earnings and profitability.

3. Growth in number of funds

As already stated that the first mutual fund namely UTI was established in 1963 which dominated the industry in
the country till 1992. With the entry of other public sector and private sector funds, it gradually lost its dominance.
As can be seen from Table 1.1 that the number of mutual funds which were 31 in 1997-98 has grown to 41 in
2010-11 at a compound growth rate of 2 percent which doesn’t compare well with the growth rates in other
emerging economies of the world. As compared to 2 percent growth rate in India, the mutual fund industry
worldwide has registered a compound growth rate of 40 percent during 1990-2009 as becomes clear from the
data detailed in Table 2. During the said period, the number of private sectors funds has grown from 21 funds in
1997-98 to 35 funds in 2010-11 at a compound growth rate of 4 percent. Compared to this, the public sector funds
have witnessed a significant decline. The number of funds which were 10 in 1997-98 declined to 6 funds in 2010-
11 at a negative compound growth rate of 4 percent.

Table 1: Growth in number of mutual funds (sector-wise)

CAGR
Year Public Sector Private Sector Total
(In %age)
1997-98 10 21 31
1998-99 10 22 32 3
1999-00 11 21 32 0
2000-01 11 24 35 9
2001-02 10 25 35 0
2002-03 9 24 33 -6
2003-04 8 23 31 -6
2004-05 6 23 29 -6
2005-06 5 24 29 0
2006-07 5 25 30 3
2007-08 5 28 33 10
2008-09 5 30 35 6
2009-10 5 33 38 9
2010-11 6 35 41 8
CGR (In %age) -4 4 2
Note: CAGR stands for compound annual growth rate & CGR stands for compound growth rate.
Source: Figures compiled from AMFI Reports

What emerges from the date detailed in Table 1 is that during the period between 1997-98 to 2010-11 mutual
fund industry in India was characterized by a significant decline in the number public sector funds and somewhat
sufficient growth in the private sector funds. As on 2011, the mutual fund industry in the country is dominated by
the private sector funds. Though India has achieved sufficient growth in the number of fund houses over a period
of time the mutual funds market is highly concentrated. Out of the 44 AMCs operating in India, approximately 80
percent, of the AUM is concentrated with 11 leading players in the market. These funds includes HDFC Mutual
Fund (13 percent), Reliance Mutual Fund (12 percent), ICICI Prudential (10 percent), UTI (9 percent), Birla Sun
Life (9 percent), SBI Mutual Funds(7 percent), Franklin Templeton (5 percent), IDFC Mutual Fund (5 percent),

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

Kotak Mahindra Mutual Fund (4 percent), DSP Black Rock Mutual Fund (4 percent) and Axis Mutual Fund (2
percent). The remaining 33 Mutual Funds account for 20 percent of AUMs as on 2013. The remaining 33 mutual
funds account for 20 percent of AUMs as on 2013. This is indicative of the fact that the market is highly
concentrated. Therefore, for the healthy growth of the industry, the need is to see the disbursement of the business
across the fund houses.

Table 2: Total number of mutual funds/schemes around the world

Year Mutual Funds Year Mutual Funds
1940 8 2001 52849
1945 73 2002 54110
1950 103 2003 54569
1960 161 2004 55524
1970 361 2005 56868
1975 426 2006 61506
1980 564 2007 61506
1985 1531 2008 69032
1990 3000 2009 65735
Source: Mutual Fund Fact Book, 1990, SEBI Handbook of Statistics

4. Growth in number of schemes

Mutual funds offer a family of schemes to suit varying needs of investors. The different schemes offered are
classified based on their structure (Liquidity) into open-ended funds and close ended funds. Based on the
investment objective, these schemes are further classified into growth funds, balanced funds (Debt and Equity),
income funds (debt) Tax saving, Gilt funds and money market mutual funds. The list of different types of fund/
schemes is given in Figure 1.

Fig. 1: Different Types of Fund Schemes

Source: AMFI website

To meet the varying needs of the investing public, the mutual fund companies in the country have been
continuously launching new schemes. As becomes clear from the data detailed out in Table 1.3 that throughout
the period under study (1997-98 to 2010-11) 2,933 new schemes have been launched. The maximum number of
new schemes i.e. 2269 or 77.36 percent of the schemes have been launched during 2006-07 to 2010-11. The
launching of new schemes has grown at a compound rate of 23 percent from 1997-98 to 2010-11. Most of the new
scheme launched during the period included Regular Income Scheme (81.79 percent) and Growth Schemes (11.56
percent). As becomes clear from the data detailed in Table 3 the two schemes together accounted for 93.35
percent of new schemes launched during the period. The rest of the schemes, i.e. Balanced, Equity Linked Saving
Scheme (ELSS) Gilt, Money Market (MM) and other schemes accounted for 1.09 percent, 1.36 percent, 1.16
percent, 1.98 percent and 1.06 percent of the new schemes launched respectively. What becomes clear from the
above discussion is that the Indian mutual fund industry has launched a good number of new schemes, however,
the majority of the new schemes launched during the period were Regular Income Schemes followed by Growth
Schemes.

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

Table 3: New schemes launched (category wise)

Year Income Growth Balanced ELSS Gilt MM Other Total
1997-98 25 13 1 4 0 0 - 43
1998-99 19 11 0 2 0 8 - 40
1999-00 14 25 8 3 12 2 - 64
2000-01 17 8 6 4 1 5 - 41
2001-02 53 17 2 0 9 9 - 90
2002-03 32 17 1 0 1 2 - 53
2003-04 29 10 2 0 2 3 - 46
2004-05 52 36 4 0 0 5 - 97
2005-06 130 46 1 8 - 5 - 190
2006-07 366 32 2 7 - 6 1 414
2007-08 539 55 2 3 2 5 6 612
2008-09 504 27 - 7 4 3 6 551
2009-10 138 19 2 2 1 3 9 174
2010-11 481 23 1 2 2 9 518
Total 2399 339 32 40 34 58 31 2933
%age to the total 81.79 11.56 1.09 1.36 1.16 1.98 1.06 100
Note: CAGR stands for compound annual growth rate.
Source: Figures compiled from AMFI Reports

A perusal of data detailed out in Table 4 also reveals that the total number of schemes in operation has grown
from 235 schemes in 1997-98 to 1,131 schemes at a compound growth rate of 14 percent which compares well
with the growth rates of other developing economies. Category-wise, Income, Growth, Balanced, Gilt, Money
Market and other schemes have grown at a compound growth rate of 18 percent, 13 percent, 4 percent, 6 percent,
7.9 percent and 37.2 percent respectively as becomes clear from the data detailed out in Table 5. It can also be
seen from the above-referred table that ELSS is the only scheme which has recorded negative compound growth
rate of 2 percent in the number of schemes in operation during the period. The number of schemes in operation
as on 2010-11 are dominated by regular income scheme which accounts for 52.25 percent of the total schemes in
operation. The growth scheme as on 2010-11 accounted for 29 percent of the total schemes in operation. As such
these two schemes accounted for 81.25 percent of the total schemes in operation in 2010-11 and rest of the
schemes namely Balanced, ELSS, Gilt, Money Market and other schemes accounted for 2.82 percent, 4.24 percent,
3.27 percent, 4.51 percent and 3.89 percent respectively. Thus it can be safely concluded that the scene in the
Indian mutual fund industry is dominated by the Regular Income Schemes followed by the Growth Schemes right
through the period under study i.e. 1997-98 to 2010-11.

Table 4: New schemes launched & total schemes in operation

New schemes launched Total schemes
CAGR
Number percent Number
(in %age)
1997-98 43 18.30 235 18
1998-99 40 14.44 277 22
1999-00 64 18.99 337 17
2000-01 41 10.43 393 6
2001-02 90 21.58 417 -8
2002-03 53 13.87 382 5
2003-04 46 11.41 403 12
2004-05 97 21.51 451 31
2005-06 190 32.09 592 28
2006-07 414 54.76 756 26
2007-08 612 64.02 956 5
2008-09 551 55.04 1001 -12
2009-10 174 19.72 882 28
2010-11 518 0 1131
Note: CAGR stands for compound annual growth rate
Source: Figures compiled from AMFI Reports

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Growth and performance of Indian mutual funds Pandow, JEFS (2017), 05(02), 26-38

Table 5: Total schemes in operation category wise

Year Income Growth Balanced ELSS Gilt MMMF Others Total
1997-98 84 74 19 58 0 0 - 235
1998-99 100 83 17 60 0 17 - 277
1999-00 113 105 23 65 13 18 - 337
2000-01 126 110 32 80 19 26 - 393
2001-02 146 114 34 63 29 31 - 417
2002-03 117 120 35 47 31 32 - 382
2003-04 131 126 37 43 30 36 - 403
2004-05 159 151 35 37 30 39 - 451
2005-06 251 194 36 37 29 45 - 592
2006-07 367 227 38 40 28 55 1 756
2007-08 506 270 37 42 30 58 13 956
2008-09 509 293 35 47 34 56 22 1001
2009-10 367 307 33 48 35 56 36 882
2010-11 591 328 32 48 37 51 44 1131
CGR
18 13 4 -2 6 7.9 37.2 14
(in %age)
Note: CGR stands for compound growth rate, ELSS stands for equity linked saving scheme, MMMF stands for money market
mutual funds
Source: Figures Compiled from AMFI Reports

5. Funds mobilized

Launching more and more new schemes are aimed at meeting the varied needs of the investing public in order to
mobilize more funds. As such launching new schemes serve the purpose only when such schemes have enabled to
mobilize more and more funds. The total funds raised by the mutual fund industry in the country has increased
from INR 18,701 crores in 1997-98 to INR 88,59,515 crores in 2010-11 thereby having registered a compound
growth rate of 67 percent as becomes clear from Table 6. The table shows that public sector mutual funds were
major mobilizer of funds in the years 1997-98 and 1998-99 accounting for 82.69 percent and 65.50 percent
respectively of the total funds mobilized. After 1998-99, the private sector mutual funds dominated the mutual
fund industry in terms of funds mobilized. The private sector funds which accounted for just 34.50 percent of the
total funds mobilized in 1998-97 have increased its share to 71.40 percent in 1999-00 which kept increasing up
to 2003-04 to 90.59 percent. However, the share of private sector mutual funds declined after 2003-04 to 76.84
percent of the total funds mobilized in 2009-10. But surprisingly in 2010-11, the share of private sector mutual
funds declined sharply to 21.86 percent only which seems to be an exceptional event. What emerges from the
above is that mutual industry in the country has witnessed some growth in a number of funds mobilized over the
period under study. Further, private sector funds which accounted for a little portion of the funds mobilized in
1997-98, have overtaken public sector funds significantly and till 2009-10 these funds occupied a dominant place
with respect to the mobilization of funds.

Table 6: Category wise funds raised by total schemes in operation (INR in Crores)
Year Income Growth Balanced ELSS Gilt MMMF Other Total
1997-98 12779 1187 4711 24 0 0 - 18701
1998-99 13738 1923 161 8 0 5547 - 21377
1999-00 17707 15020 5717 247 5132 15925 - 59748
2000-01 26674 17996 7701 214 4160 36212 - 92957
2001-02 51021 1983 477 33 6439 104570 - 164523
2002-03 109423 4618 361 22 5202 195047 - 314673
2003-04 172939 26642 2523 53 12387 375646 - 590190
2004-05 155719 37079 3755 154 4361 638594 - 839662
2005-06 168792 82086 4006 3935 2480 836859 - 1098158
2006-07 21106 89682 4473 4669 1853 1626790 99 1748672
2007-08 881345 119833 11488 6448 3180 3432738 9339 4464371
2008-09 1180694 29481 2695 3324 14696 4187977 7486 5426353
2009-10 2895901 61114 4693 3601 3974 7044818 4922 10019023
2010-11 2172860 63142 7490 3450 4450 6599724 8399 8859515
CGR (in % age) 53.00 39.00 4.00 51.00 - - - 67.00

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Note: CGR stands for compound growth rate, ELSS stands for equity linked saving scheme, MMMF stands for money market
mutual funds, Others include Gold ETF, other ETF & FOF overseas
Source: Figures Compiled from AMFI Reports

Category wise: Regular Income Funds accounted for a major portion of the funds mobilized in the years from
1997-98 to 1999-00 with a total contribution of 68.33 percent, 64.27 percent, and 29.64 percent respectively
followed by Balance Funds in 1997-98 which accounted for 25.19 percent. In 1998-99, the other major contributor
was Money Market Funds which accounted for 25.95 percent of the total funds mobilized. After 2000-01, most of
the funds in the industry were mobilized in Money Market Funds whose share in 1998-99 was 25.95 which had
increased to 83.92 percent in 2006-07 and as on 2010-11 it remained at 74.49 percent. As against this, the Income
Scheme which accounted for a major portion of the funds mobilized in 1997-98 had witnessed a steady decline in
its share of funds mobilized during the reference period (1997-98 to 2010-11). Its share declined from 68.33
percent in 1997-98 to a low of 10.89 percent in 2006-07, and as on today, it accounted for 24.52 percent only.
After 2000-01 the other schemes namely Growth, Balanced, ELSS, Gilt, Money Market and other schemes
contributed very little to the total funds mobilized. The combined share of these schemes ranged only between 4
to 5 percent which is negligible by all standards. From the above discussion, two inferences can be drawn that
over a period of time, the Money Market Mutual Funds (MMMF) emerged as a major contributor to the funds
mobilized and since 2000-01 it continues to dominate the industry in terms of funds mobilized. Contrary, the
Income Scheme which was initially dominant schemes gradually lost its ground to the MMMF and had witnessed
a sharp decline in the share of funds mobilized during the period. Among other schemes, except ELSS and Growth
Schemes, all other schemes have registered little or no growth in the funds mobilized. The Growth & ELSS Scheme
have registered sufficient growth in the funds mobilized during the period but right from the beginning ELSS
Scheme accounted for a very little portion of the funds mobilized, but is gaining popularity. The Growth Scheme
which continued to be one of the important schemes till 2000-01 witnessed a significant decline in its share to the
total funds mobilized by the industry and as on 2010-11 its contribution has been negligible.

6. Assets under management of mutual funds

Mutual Funds are expected to play a crucial role in mobilizing particularly household savings and to manage the
funds efficiently so as to provide sufficient return to the investors. Although, the Indian mutual funds have to go a
long way in its role play on the above-referred lines yet, over a period of time it has achieved some noticeable
growth & development. As becomes clear from the data detailed in Table 7 that the net assets under the
management of mutual funds have increased from INR 68,984 crore in 1997-98 to INR 5,92,250 crore in 2010-11
at a compound growth rate of 20 percent. It can also be seen from the above-referred table that during the
reference period, the maximum growth has been recorded by the private sector mutual funds and the public sector
mutual funds have gained little growth. The private sector mutual funds have recorded a compound growth rate
of 48 percent in the net assets under its management during the period 1997-98 to 2010-11. Compared to this
phenomenal growth rate, the net assets under the management of public sector mutual funds have grown just at
a compound growth rate of 6 percent during the same period which by all means is dismal. Of the two sectors, the
public sector mutual funds have witnessed a sharp decline in its share of the total net assets under the
management of mutual funds. From the data presented in Table 1.7 reveals that 94.07 percent of the total assets
were under the management of public sector funds in 1997-98 which had declined to 22.1 percent in 2010-11.
This sharp decline is due to the increasing dominance of the private sector mutual funds in India. The private
sector mutual funds which were an insignificant player in the industry in 1997-98 with a total share of 5.93
percent of the total assets under its management have witnessed a significant spurt in its business share. The
assets under its management have witnessed an increasing trend and have increased from 5.93 percent in 1997-
98 to 77.9 percent in 2010-11. The fact that becomes evident from the data presented in Table 1.7 is that the public
sector mutual funds have lost its dominating role in the private sector mutual funds. Based on multiple
parameters, the private sector mutual funds as on 2011 are major and dominating player in the Indian mutual
fund industry.

Table 7: Assets under management as on March 31 category wise

Year Income Growth Balanced ELSS Gilt MMMF Other Total
1997-98 NA NA NA NA NA NA - 68984
1998-99 48372 14622 1909 2477 0 1092 - 68472
1999-00 49859 26927 26757 4865 2370 2227 - 113005
2000-01 48863 13483 19273 2523 2317 4128 - 90587
2001-02 55788 13852 16954 1768 4163 8069 - 100594
2002-03 47564 9887 3141 1228 3910 13734 - 79464
2003-04 62524 23613 4080 1669 6026 41704 - 139616
2004-05 47605 36711 4867 1727 4576 54068 - 149554

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2005-06 60278 92867 7493 6589 3135 61500 - 231862

2006-07 119322 113386 9110 10211 2257 72006 96 326388
2007-08 220762 156722 16283 16020 2833 89402 3130 505152
2008-09 197343 95817 10629 12427 6413 90594 4077 417300
2009-10 311715 174054 17246 24066 3395 78094 5409 613979
2010-11 291975 169754 18445 25569 3409 73666 9432 592250
Note: ELSS stands for equity linked saving scheme, MMMF stands for money market mutual funds, Others include Gold ETF,
other ETF & FOF overseas
Source: Figures Compiled from AMFI Reports

7. AUM composition by product, investor, and geographical distribution

The product category of Indian mutual fund is broadly classified into six categories namely: Liquid/Money Market,
Equity Oriented, Debt Oriented, Balanced, Gilt and Gold ETFS. Gilt category constitutes a major position of the
AUMs as on 2013. It can be seen from figure 2 that Debt Oriented accounted for 57 percent of the AUMs as on
2013, and its share had increased from 50 percent in 2011 to 57 percent in 2013. The share of Gilt and
Liquid/Money Market segment which was negligible at one point of time is showing an increasing trend, and as
on 2013, it accounted for 16 percent of the total AUMs. The Equity Oriented Funds account for only 22 percent of
the total AUMs as on 2013. Compared to this the Balanced Schemes account for 2 percent of AUM. It becomes quite
clear that tiny portion of the funds is channelized towards Gold ETFS, Balanced and Liquid/Money Market. The
other fact is that the Debt Oriented Funds have recorded significant growth during the last few years. These have
recorded significant growth due to the popularity of gold as an investment for Indians as well as due to lowering
of administrative charges.

Figure 2: Mutual fund composition by product category.

Figure 3: Mutual fund composition by investors segment.

While looking at the AUM composition by investor segment, it can be seen from figure 3 that corporate
investments constitute 49 percent of AUM followed by High Net Worth Investors. Both of these categories of
investors prefer Debt/Money Market funds rather than the equity. The retail investments account for 20 percent
of AUM. These also prefer debt oriented funds rather than equity.

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As on 2013, out of the total Equity AUM, Retail investment constitute mere 1.95 percent, which is indicative of
poor Equity culture among the retail investing public in the country. Equity AUM mainly consists of FII investment.
As such on the basis of the above, it can be concluded that the mutual funds have not yet achieved a breakthrough
in penetrating deep into the retail segment. Retail investors in the country continue to prefer bank deposits and
the real estate sector as viable investment avenues for putting their savings.

The poor participation of retail segment through mutual fund route is due to very low levels of awareness &
financial literacy, shown capital market growth, and the cultural & behavioral factors. The other important factor
is the failure of the mutual fund industry to penetrate across the cities and towns of the country. As can be seen
from Figure 1.4 that top five cities namely Mumbai, Delhi, Chennai, Bangalore, and Calcutta contribute 74 percent
of the total funds mobilized. All other remaining cities contribute 26 percent of the total funds with the bottom 75
cities with only 5 percent. Therefore, increasing penetration ratio is need of the hour. The key to combating this
challenge is to ensure a wider distribution reach and greater investor awareness through investor education
drives.

Figure 4: Mutual fund composition by geography.

8. Mobilization of household savings

The earlier discussion had made it clear that the Indian mutual fund industry had come a long way since 1963
when the first mutual fund was established by the UTI. Today, there are 51 mutual funds belonging to the public
sector, domestic private sector and foreign private sector funds offering a wide variety of schemes and products
to the investing public at the national and international level. Over a period of time, significant innovations have
been made in its product profile to meet the varied needs of the investing public. But the question is has the Indian
mutual industry fully realized its goal of mobilizing a major portion of household savings or enabled the small
savers to benefit from the economic growth that the country has been witnessing by facilitating them to park their
savings into the assets which yield better risk-adjusted returns.

According to the World Bank, Gross domestic savings (percent of GDP) in India was last measured at 29 in 2011.
Gross domestic savings are calculated as GDP less final consumption expenditure (total consumption).

Figure 5: Gross domestic savings (percent of GDP) in India

Source: World Bank historical data

Gross Domestic Savings (GDS) as a percentage of Gross Domestic Product (GDP) in India is highest in the world.
A perusal of figure 5 reveals that as on 2009-10, the GDS as a percentage of GDP is 33.7 percent which was just

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16.9 percent in 1975-76. From the data presented in the above-mentioned table, it becomes clear that India has
witnessed a steady growth in GDS as a percentage of GDP which was 16.9 percent in 1975-76, had increased
gradually to 24.4 percent in 1995-96 then declined marginally to 23.7 percent in 2001-02. In the first part of the
decade of 2001, it has recorded significant growth from 23.7 percent in 2001-02 to 34.2 percent in 2005-06. The
other fact that becomes clear from the data presented in the table is that the major contribution to GDS in the
country has remained from House Hold Sector (HHS) right from the beginning. It can be seen from the table that
as on 2009-10, the HHS accounted for 69.7 percent of the total GDS which had peaked to 93 percent in 2001-02.
The other fact that emerges from the data is that the HHS has recorded a steady growth in its contribution to GDS.
The share of HHS was 64 percent in 1975-76 which had increased to 93 percent in 2001-02. However, between
1975-76 to 2009-10 it had remained in the range between 64 percent to 93 percent. What emerges from the above
is that the GDS as a percentage of GDP has recorded steady growth and most of the savings come from the HHS in
the country.

Figure 6: Mutual fund share of Indian GDP

The share of AUM of mutual fund in GDP

12
10.13
10 9.37
7.9 7.47
8 6.48
6 4.75
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Source: Compiled from AMFI reports

Sufficient and increasing GDS will serve the purpose only when the savings are channelised into productive assets.
The financial institutions have a role to play in this direction. Since mutual funds are one of the important financial
intermediaries whose role in the mobilization of household savings, in particular, is crucial. Mutual fund industry
in the country has come a long way to assist the transfer of HHS to the real sector of the economy. This fact
becomes evident from the increasing share of Assets Under the Management (AUM) of mutual funds to GDP. As
indicated by the Figure 6 that the ratio of AUM to GDP increased gradually from 4.75 percent in 2004-05 to 9.37
percent in 2009-10. However, the ratio of 9.37 percent is significantly lower than the ratio of AUM to GDP in
developed countries of the world where it ranges between 20 percent to 70 percent. Among the category of
emerging economics, Brazil has AUM to GDP ratio of 40 percent and around 33 percent for South Africa. As such
the mutual fund industry has to go a long way in fully realizing its role in mobilizing savings particularly of the
HHS.

The House Hold Sector saves in the form of currency, bank and non-banking deposits, life insurance fund,
provident and pension fund claims on government, and shares & debentures. For economic growth, it is necessary
that the savings are held in financial assets such as deposits, shares & debentures; and in the form of contractual
savings rather than in currency which is likely to result in the creation of unproductive assets like gold. Further,
direct transfer of savings is preferred for a reason being less costly. For direct transfers through the instruments
of shares & debentures, the mutual fund route is being encouraged for safety and other reasons. Owing to this fact,
a number of measures were taken by the regulator to encourage channelization of HHS through mutual funds.

Table 8: Instrument-wise distribution of household financial assets (in percent)

Financial Assets 96-97 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11
Currency 8.6 9.7 8.9 11.2 8.5 8.7 10.2 11.4 12.7 9.8 13.3
Fixed Income
84.5 81.8 86.9 81.6 85.4 84 80.6 78.2 88 85.6 87.1
(a+b+C)
a) Deposits 48.1 39.4 40.9 38.8 37.0 47.1 49.1 52.2 60.7 47.2 47.3
b) Insurance/
29.4 30.3 31.1 27.3 28.9 24.7 28.8 27.9 31.1 34.1 33.3
Provident Fund
c) Small Savings 7 12.1 14.9 15.5 19.5 12.2 2.7 -1.9 -3.8 4.3 6.5
Securities
7 8.5 4.2 7.5 6 7.3 9.3 10.3 -3.5 4.6 -4
market (d+e+f)
d) Mutual funds 0.3 1.8 1.3 1.2 0.4 3.6 5.3 7.9 -1.4 3.3 -1.8

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e) Govt.
0.4 5.8 2.5 7.5 4.9 2.4 0.3 -2.1 0.0 0.0 0
Securities
f) Other
6.3 0.9 0.4 -1.2 0.7 1.3 3.7 4.5 -2.1 1.3 -2.2
securities
Total 100 100 100 100 100 100 100 100 100 100
Source: Handbook of Statistics Indian securities market and RBI Annual Reports

A perusal of data about the household sector's financial assets portfolio detailed out in Table 8 reveals that
households held a large proportion of their savings in the form of deposits (both banking & non-banking). As can
be seen from the above-stated table that the deposits which were 48.1 percent in 1996-97 have decreased to 37
percent in 2004-05 and then increased to 52.2 percent and 60.7 percent in 2006-07 and 2007-08 respectively.
The spurt in bank deposits in 2006-08 was due to a recession in the Indian capital market during the period.
However, the fact that becomes evident is that the bank deposits continue to constitute a major form in which
household savings are held in India throughout the period 1996-97 to 2010-11. The other fact is that it has
witnessed a marginal decline from 48.1 percent in 1996-97 to 47.3 percent in 2010-11 of total household savings.
It can also be seen from the Table 1.9 that the contractual savings or savings under provident fund schemes,
pension, and life insurance funds were the next preferred form of savings for the Indian savers during the period.
As such it can be concluded that mutual funds are not the preferred choice for the household sector for parking
savings. Therefore, the need of the hour is that the mutual fund industry is to find out ways and means for
attracting more and more funds from the household sector, which carries an enormous socio-economic sense.

9. Discussion and conclusion

The Indian mutual fund industry has come a long way since its inception in 1963. The industry has witnessed
sufficient growth on all parameters be it; a number of fund houses, No. of schemes, funds mobilized, assets under
management, etc. The fund industry, in the beginning, consisted of UTI mutual fund only, but today the industry
consists of all the three sectors viz. public sector, private sector, and foreign fund houses. The fund houses which
were just 31 in 1997-98, have grown to 44 funds as on 2013. Similarly, the number of schemes in operation have
grown from 235 in 1997-98 to 1,131 schemes at a compound growth rate of 14 percent. The major schemes in
operation are regular Income Schemes which account for 52 percent of the total schemes, followed by Growth
Schemes with 29 percent of the total schemes. ELSS is the only scheme which has recorded negative growth during
the period.

The total funds raised by the industry in the country has increased from INR 18,701crore in 1997-98 to INR
88,59,515 crore in 2010-11 at a compound growth rate of 67 percent. The public sector mutual funds were major
mobilizer of funds up to 1998-99. With around 66 percent share, but 1999 onwards, private sector mutual funds
dominated the industry in terms of funds mobilized with a share of 90.59 percent as on 2003-04.

The Money Market Mutual Fund (MMMFs) emerged as a major contributor to the funds mobilized and since 2000-
01 it continues to dominate the industry in terms of funds mobilized. Contrary the Income Scheme which was
initially the major contributor has gradually lost its ground to the MMMFs.

In terms of Assets Under Management (AUM), the industry recorded significant growth. The net assets under the
management have increased from INR 68,984 crore in 1997-98 to INR 5,92,250 crore in 2010-11 at a compound
rate of 20 percent. Category-wise, the private sector funds have recorded a compound growth rate of 48 percent
as against the growth rate of 6 percent by the public sector funds, indicating thereby that the dominating place of
private sector funds which at one point of time accounted for only 5.93 percent of AUMs which as on 2010-11
account for 77.9 percent. One thing that is evident is that in terms of AUMs, the mutual fund industry has recorded
more than satisfactory growth since its inception. However, the growth is more pronounced towards the private
sector funds and the public sector funds which dominated the fund industry in the country, have been overtaken
by the private sector funds.

Product wise Indian fund industry broadly consists of six product categories viz. Liquid & Money Market, Equity
Oriented, Debt Oriented, Balanced, Gilt and Gold ETFs. The industry is dominated by Gilt and Liquid Money Market,
and these product categories accounted for around 73 percent of AUMs in 2013. The equity-oriented funds
account for only 1 percent of the total AUMs as on 2013. Besides, the Gold ETFs have recorded significant growth
during the last few years from a much smaller base.

While looking at AUM composition by investor segment, corporate investments constitute nearly half of the AUMs,
followed by high net worth investors. The retail segment accounts for just 20 percent of AUMs. As such, it can be
inferred that the mutual funds have failed to penetrate deep into the retail segment. Retail investors in the country

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continue to prefer bank deposits and the real estate sector. The poor participation of the retail segment through
mutual funds is reported due to shallow levels of awareness in financial literacy, cultural and behavioral factors.
The other important factor is the failure of the mutual fund industry to reach out to the nook and corner of the
country. The top five cities namely: Mumbai, Delhi, Chennai, Bangalore, and Kolkata contribute 74 percent of the
total funds mobilized. Therefore, among other things, the need is to increase the penetration ratio.

One of the important goals of the mutual fund industry is to attract and mobilize major portion of the House Hold
Savings (HHS) in order to enable the small savers to benefit from the economic growth by facilitating them to park
their savings into the assets which yield better risk-adjusted returns. Therefore, the question arises, has the Indian
mutual industry succeeded in achieving this goal? The fact about it is that the Gross Domestic Saving (GDS) as a
percentage of GDP has recorded significant growth and the HHS account for three-quarter of the GDS. Although
the mutual fund industry has succeeded in increasing its share from the GDS, the ratio of AUM to GDP is much
lower than the developed countries of the world. Further, the household sector which accounts for the major
position of the Gross Domestic Savings have shown least preference for mutual funds; rather these have been
found to prefer most deposits, both banking and non-banking.

Though the mutual fund industry has recorded significant progress on all fronts, yet it has not been able to utilize
its potential fully. On almost on all parameters, it is far behind the developed economies and even most of the
emerging economies of the world. The industry is confronted with a number of challenges like low penetration
ratio, lack of product differentiation, lack of investor awareness and ability to communicate value to customers,
lack of interest of retail investors towards mutual funds and evolving nature of the industry. Therefore, if the
industry has to utilize its potential fully, it has to address these challenges. To meet these challenges, the need is
to penetrate into the tier II & tier III cities which among other things would require seeking more awareness of
the investors through strategic initiatives and investor education drives. Apart from this, the mutual fund industry
has to continually deliver superior risk-adjusted returns to the investors. This would require the fund managers,
on the one hand, to exhibit superior stock selectivity and market timing performance consistently and on the other
hand to keep the fund costs under check. Delivering superior risk-adjusted returns consistently will automatically
create a niche for the mutual funds.

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