Mutual funds have become a cornerstone of personal finance in India, offering investors a structured and professional avenue to grow their wealth. These investment vehicles pool money from multiple investors to invest in a diversified portfolio of assets like stocks, bonds, and money market instruments.
Over the years, mutual funds have evolved to cater to the diverse financial goals of Indian investors, from wealth creation to tax savings.
Historical Evolution of Mutual Funds in India
The Genesis (1963–1987)
The journey of mutual funds in India began in 1963 with the establishment of the Unit Trust of India (UTI) by the Government of India and the Reserve Bank of India. UTI’s primary objective was to encourage savings and investments among the Indian populace. The first scheme launched by UTI was the Unit Scheme 1964 (US-64), which became immensely popular due to its attractive returns and government backing.
Entry of Public Sector Funds
In 1993, SEBI’s regulations allowed private sector entities to join the mutual fund landscape, expanding investment options for investors. State Bank of India (SBI) became the first public sector bank to launch its mutual fund in June 1987, followed by other institutions like Canara Bank, Punjab National Bank, and Life Insurance Corporation (LIC).
Liberalization and Private Sector Involvement (1993–2003)
The liberalization of the Indian economy in the early 1990s paved the way for private sector participation in the mutual fund industry. In 1993, the Securities and Exchange Board of India (SEBI) was appointed as the regulatory body for mutual funds, ensuring investor protection and market integrity. The same year, the first private sector mutual fund, Kothari Pioneer (now Franklin Templeton), was launched. This period witnessed the entry of several private players, both domestic and international, into the Indian mutual fund market.
Growth and Consolidation (2003–2014)
The period between 2003 and 2014 saw significant growth in the mutual fund industry. The bifurcation of UTI in 2003 into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India (SUUTI) marked a new phase. The industry’s Assets Under Management (AUM) crossed ₹10 trillion in May 2014, reflecting the increasing investor confidence and participation.
Recent Developments (2014–Present)
Since 2014, the mutual fund industry in India has witnessed exponential growth. As of February 2025, the industry’s AUM stands at ₹64.53 trillion, with over 23 crore investor folios. This growth can be attributed to factors like increased financial literacy, the popularity of Systematic Investment Plans (SIPs), and the digitalization of investment platforms.
Types of Mutual Funds in India
Mutual funds in India can be broadly classified based on their investment objectives, asset classes, and structure.
Based on Investment Objectives
Equity Funds: These funds primarily invest in stocks and aim for capital appreciation. They are suitable for investors with a high-risk appetite and a long-term investment horizon.
Debt Funds: These funds invest in fixed-income securities like bonds and government securities. They are ideal for conservative investors seeking regular income with lower risk.
Hybrid Funds: These funds invest in a mix of equities and fixed-income instruments, balancing risk and return. They are suitable for investors looking for moderate risk and return.
Liquid Funds: These are short-term debt funds that invest in instruments with a maturity of up to 91 days. They are ideal for parking surplus funds with high liquidity.
Tax-Saving Funds (ELSS): Equity Linked Savings Schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act. They have a lock-in period of 3 years and invest primarily in equities.
Based on Asset Class
Equity-Oriented Funds: Invest predominantly in equities.
Debt-Oriented Funds: Invest primarily in debt instruments.
Balanced Funds: Invest in a combination of equities and debt instruments.
Based on Structure
Open-Ended Funds: Investors can buy and sell units at any time at the prevailing Net Asset Value (NAV).
Close-Ended Funds: These funds have a fixed maturity period and are listed on stock exchanges.
Interval Funds: A hybrid between open and close-ended funds, offering limited liquidity at specified intervals.
Regulatory Framework
The mutual fund industry in India is regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency, fairness, and protection of investor interests. Key regulations include:
SEBI (Mutual Funds) Regulations, 1996: These regulations govern the functioning of mutual funds in India.
SEBI (Portfolio Managers) Regulations, 1993: These regulations apply to portfolio management services.
SEBI (Research Analysts) Regulations, 2014: These regulations pertain to research analysts providing investment advice.
SEBI mandates mutual funds to disclose their portfolios, NAVs, and performance reports regularly, ensuring transparency in operations.
Taxation of Mutual Funds
The taxation of mutual funds in India depends on the type of fund and the holding period.
Equity-Oriented Funds
Short-Term Capital Gains (STCG): Taxed at 15% if units are sold within 12 months.
Long-Term Capital Gains (LTCG): Taxed at 10% on gains exceeding ₹1 lakh in a financial year.
Dividend Distribution Tax (DDT): Dividends are subject to a 10% tax at the investor’s end.
Debt-Oriented Funds
Short-Term Capital Gains (STCG): Taxed as per the investor’s income tax slab if units are sold within 3 years.
Long-Term Capital Gains (LTCG): Taxed at 20% with indexation benefits if units are sold after 3 years.
Dividend Distribution Tax (DDT): Dividends are subject to a 25% tax at the investor’s end.
Tax-Saving Funds (ELSS)
Short-Term Capital Gains (STCG): Taxed at 15% if units are sold within 3 years.
Long-Term Capital Gains (LTCG): Taxed at 10% on gains exceeding ₹1 lakh in a financial year.
Dividend Distribution Tax (DDT): Dividends are subject to a 10% tax at the investor’s end.
Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is a disciplined way to invest in mutual funds. It allows investors to invest a fixed amount regularly, typically monthly or quarterly, into a mutual fund scheme. SIPs offer several.
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