A Brief History of Mutual Funds in India
Mutual funds have become a popular investment option for many individuals in India. They offer the opportunity for small investors to invest in a diversified portfolio of assets managed by professionals. In this blog, we will take a closer look at the history of mutual funds in India.
Early Days of Mutual Funds in India
The concept of mutual funds in India dates back to the 1960s when the government launched the Unit Trust of India (UTI). The UTI was the first mutual fund in India and it was set up by the Reserve Bank of India (RBI) and the Government of India. The aim of the UTI was to mobilize savings from small investors and invest them in the stock market.
Liberalization and the Rise of Private Mutual Funds
In 1991, India opened up its economy to foreign investment and liberalized its financial sector. This led to the entry of private sector mutual funds in India. In 1993, the first private mutual fund in India, Kothari Pioneer Mutual Fund, was launched.
In 1996, the Securities and Exchange Board of India (SEBI) was established as the regulator of the securities market in India. SEBI laid down regulations for the mutual fund industry in India, which led to the growth of the industry.
The Growth of the Mutual Fund Industry in India
The mutual fund industry in India has seen tremendous growth over the last two decades. According to the Association of Mutual Funds in India (AMFI), the assets under management (AUM) of the mutual fund industry in India stood at INR 35.04 lakh crore as of February 2023.
The Growth of Systematic Investment Plans (SIPs)
Systematic Investment Plans (SIPs) have become a popular way of investing in mutual funds in India. SIPs allow investors to invest a fixed amount of money in a mutual fund at regular intervals. This helps inculcate the habit of saving and investing regularly.
The Different Types of Mutual Funds Available in India
Mutual funds in India offer a variety of investment options to investors. Some of the different types of mutual funds available in India include:
- Equity Funds: These funds invest primarily in stocks of companies listed on the stock exchange. They are suitable for investors with a long-term investment horizon and a high-risk appetite.
- Debt Funds: These funds invest primarily in fixed income securities like bonds, debentures, and government securities. They are suitable for investors who want regular income and are looking for a low-risk investment option.
- Balanced Funds: These funds invest in both equities and debt securities. They are suitable for investors who want to benefit from both capital appreciation and regular income.
- Index Funds: These funds invest in a portfolio of stocks that replicate a particular stock market index like the Nifty or the Sensex. They are suitable for investors who want to invest in the stock market but do not have the expertise to select individual stocks.
- Tax-Saving Funds: These funds offer tax benefits under Section 80C of the Income Tax Act. Investors can claim tax deductions up to INR 1.5 lakh per annum by investing in these funds.
The Benefits of Investing in Mutual Funds
Mutual funds offer several benefits to investors, such as:
- Diversification: Mutual funds invest in a diversified portfolio of assets, which helps reduce the risk of the investment.
- Professional Management: Mutual funds are managed by professional fund managers who have the expertise to select the right securities for the portfolio.
- Low Entry Barrier: Mutual funds offer a low entry barrier, which means that even small investors can invest in mutual funds.
- Liquidity: Mutual funds offer high liquidity as investors can buy and sell units of the fund on any business day.
Conclusion
Mutual funds in India have come a long way since the launch of the Unit Trust of India in the 1960s. The liberalization of India’s economy in the 1990s led to the growth of private sector mutual funds in India. The mutual fund industry in India has seen tremendous growth over the last two decades and offers a variety of investment options to investors. Mutual funds offer several benefits to investors, such as diversification, professional management, low entry barriers, and high liquidity. With the growth of the Indian economy and the increasing awareness of the benefits of investing, the mutual fund industry in India is poised for further growth in the coming years.
Other Related Blogs: Section 144B Income Tax Act
Frequently Asked Questions (FAQs)
Q.What is a mutual fund? A mutual fund is a professionally managed investment scheme that pools money from multiple investors to invest in a diversified portfolio of assets like stocks, bonds, and other securities.
Q.Who can invest in mutual funds in India? Any individual, HUF, NRI, or institution can invest in mutual funds in India.
Q.How do mutual funds work? When an investor invests in a mutual fund, their money is pooled with money from other investors to form a large pool of funds. This pool of funds is managed by a professional fund manager who invests the money in a diversified portfolio of assets to achieve the investment objectives of the scheme.
Q.What are the different types of mutual funds available in India? Some of the different types of mutual funds available in India include equity funds, debt funds, balanced funds, index funds, and tax-saving funds.
Q.What is SIP and how does it work? SIP stands for Systematic Investment Plan. It is a mode of investment in mutual funds where investors can invest a fixed amount of money at regular intervals (usually monthly). This helps inculcate the habit of saving and investing regularly and allows investors to benefit from the power of compounding.
Q.What are the costs associated with investing in mutual funds in India? Mutual funds charge various fees and expenses, such as fund management fees, exit loads, expense ratio, and transaction costs. Investors should read the scheme information document (SID) carefully to understand the costs associated with investing in a mutual fund.
Q.What are the tax implications of investing in mutual funds in India? The tax implications of investing in mutual funds in India depend on the type of mutual fund, the holding period, and the tax laws in force. Equity mutual funds held for more than one year are exempt from long-term capital gains tax, while debt mutual funds held for more than three years are taxed at 20% with indexation.
Q.How can investors track the performance of mutual funds in India? Investors can track the performance of mutual funds in India by looking at various parameters like the fund’s returns, the fund’s benchmark, the expense ratio, and the risk-adjusted returns. Investors should also read the fund’s annual report and fact sheet to understand the fund’s performance in detail.
Q.Is investing in mutual funds safe? Investing in mutual funds involves market risks, and the value of the investment can go up or down based on the performance of the underlying assets. However, investing in mutual funds can be safer than investing in individual stocks as mutual funds offer diversification and professional management.
Q.How can investors choose the right mutual fund to invest in? Investors should consider various factors like their investment goals, risk appetite, investment horizon, and the track record of the fund before investing in a mutual fund. Investors should also read the scheme information document (SID) carefully and seek the advice of a financial advisor if required.
