Table of Contents
Chapter 8: Basics of Mutual Funds
Chapter 8: Basics of Mutual Funds
Learning Objectives
After studying this chapter, you should understand:
- Concept, economic rationale, and operational mechanism of Mutual Funds.
- Historical evolution of the Indian mutual fund industry across four distinct phases.
- The transition from statutory monopoly to competitive private and international participation.
- Regulatory establishment of SEBI oversight and the SEBI (Mutual Funds) Regulations, 1996.
- Role, organizational mandate, and regulatory code of the Association of Mutual Funds in India (AMFI).
8.1 The Mutual Fund Concept
A Mutual Fund is an investment vehicle formed as a public trust that mobilizes money from thousands of investors who share common financial goals. The collected corpus is invested in a diversified portfolio of capital market instruments (equities, corporate bonds, government securities, and money market instruments) managed by professional fund managers.
THE MUTUAL FUND FLOW OF CAPITAL
Investors (Unit Holders)
│
▼ (Pool capital & receive units)
MUTUAL FUND
│
▼ (Invests in diversified portfolio)
Securities Portfolio
(Equity, Debt, Money Markets)
│
▼ (Generates returns: dividends, capital gains)
Passed Back to Investors
(Proportionate to units held)
Core Economic Benefits
- Professional Management: Full-time research analysts and portfolio managers track companies, macroeconomic indicators, and market valuation metrics.
- Diversification: Spreads risk across 40–80 companies and multiple sectors, eliminating unsystematic stock-specific risk.
- Affordability: Investors can participate in expensive high-priced equities through SIPs starting as low as ₹100 or ₹500.
- Tax Efficiency: Capital gains within the fund during portfolio rebalancing are completely exempt from tax; tax is paid only by the investor upon redemption.
8.2 Historical Evolution of Mutual Funds in India
The Indian mutual fund industry has traversed four transformative phases over six decades:
┌────────────────────────────────────────────────────────────────────────────────────────────────┐
│ HISTORICAL PHASES OF INDIAN MUTUAL FUNDS │
├────────────────────┬───────────────────────────────────────────────────────────────────────────┤
│ Phase I (1964-1987)│ **Monopoly of Unit Trust of India (UTI)**: Created under the UTI Act, │
│ │ 1963 by Parliament. Unit Scheme 1964 (US-64) was India's first mutual │
│ │ fund product, offering assured dividend returns. │
├────────────────────┼───────────────────────────────────────────────────────────────────────────┤
│ Phase II (1987-1993│ **Entry of Public Sector Mutual Funds**: State-owned commercial banks │
│ │ and life/general insurers allowed to establish mutual funds. │
│ │ • SBI Mutual Fund (first non-UTI fund, June 1987). │
│ │ • Followed by Canbank, Punjab National Bank, Indian Bank, LIC, and GIC. │
├────────────────────┼───────────────────────────────────────────────────────────────────────────┤
│ Phase III (1993-200│ **Entry of Private Sector Funds & SEBI Regulation**: │
│ │ • First SEBI (Mutual Funds) Regulations notified in 1993. │
│ │ • Kothari Pioneer (now Franklin Templeton) established in 1993 as the │
│ │ first private sector mutual fund in India. │
│ │ • Modern comprehensive SEBI (Mutual Funds) Regulations notified in 1996. │
│ │ • Repeal of the UTI Act in 2002; bifurcated into SUUTI and UTI Mutual Fund.│
├────────────────────┼───────────────────────────────────────────────────────────────────────────┤
│ Phase IV (2003-Pres│ **Consolidation, Digital Transformation & Financialization**: │
│ │ • Introduction of mandatory Direct Plans in January 2013. │
│ │ • Mandatory Categorization & Rationalization of Schemes (October 2017). │
│ │ • Surge in retail SIPs, electronic KYC, and mobile fintech platforms. │
└────────────────────┴───────────────────────────────────────────────────────────────────────────┘
8.3 Association of Mutual Funds in India (AMFI)
Established in 1995, AMFI is the apex industry association of all SEBI-registered Asset Management Companies in India:
- Industry Representation: Interacts with the Ministry of Finance, RBI, and SEBI on tax and regulatory matters affecting the mutual fund ecosystem.
- Distributor Licensing (ARN): Issues the mandatory AMFI Registration Number (ARN) and Employee Unique Identification Number (EUIN) to mutual fund distributors, independent financial advisors (IFAs), and corporate agents upon passing the NISM-Series-V-A certification.
- Code of Ethics: Promotes ethical business standards, sets commission disclosure guidelines, and enforces the AMFI Code of Ethics.
- Investor Awareness: Administers the nationwide investor education campaign ("Mutual Funds Sahi Hai").
Chapter Summary & Exam Cheat Sheet
- UTI Establishment: Unit Trust of India was created in 1963; launched US-64 in 1964.
- First Non-UTI Mutual Fund: SBI Mutual Fund launched in June 1987.
- First Private Sector Fund: Kothari Pioneer launched in 1993.
- SEBI MF Regulations: Comprehensive landmark regulations notified in 1996.
- UTI Bifurcation: Repealed in 2002; split into SUUTI (Specified Undertaking of UTI) and UTI Mutual Fund (governed by SEBI).
- Direct Plans Mandate: Introduced in January 2013 by SEBI to eliminate distributor commissions.
- AMFI Role: Issues ARN cards to distributors; enforces industry code of ethics; represents all 44+ AMCs.