Newspapers are full of stories about the strong flow of money into mutual funds.
That is not to say that mutual funds are a new way to invest in shares. Actually, mutual funds
have been around for a long time - 1964, to be exact. That is when the Unit Trust of India
launched its pioneering Unit Scheme 1964 and raised Rs 250 m. Today the Unit Trust of India has
total assets of Rs. 533.2 bn and owns an estimated 7% of the stock market.
Easy way to invest
As an individual investor,
it is difficult to monitor the trends in the fast-paced world of finance. Investing in shares and
debentures is risky business and requires continuous monitoring of one's investments. This
monitoring not only takes time, but also requires a fair bit of knowledge of financial terms and
an understanding of the ever-changing economic environment within which the companies operate.
An individual may prefer to invest his money into a mutual fund and leave the analysis and
investment decisions to professionals. Qualified investment professionals are better equipped to
analyze financial risks and opportunities. A mutual fund is a pool of money contributed by
individuals who have similar financial goals. This pooling of funds enables investors to
collectively increase their buying power. It also provides investors an opportunity to hire a
professional manager to invest and monitor their money.
From one to many
As indicated, mutual funds in India have a long history. It all began with the
setting up of the Unit Trust of India in 1964 but, due to the monopoly enjoyed by UTI, the
controls on expansion for Indian industry, and the relatively quiet capital markets, there was
not much growth in equity funds until the late 1980's. Companies seeking money to fund projects
took loans from the financial institutions, the major suppliers of long term finance. At this
stage of its evolution mutual funds had less avenues for making good investments.
Growth in the sale of mutual funds units remained relatively slow until 1987
when public sector banks and financial institutions were allowed to launch their own mutual
funds. Their entry led to an increase of inflows into mutual funds as new schemes were floated.
This trend continued till the 1992 boom but, after the "1992 Stock Scam", investors preferred to
stay away from the equity markets. The fact that many public sector banks were implicated in the
scam also discouraged investors from investing money into mutual funds. Many of these funds had
launched guaranteed return funds and, with the fall in the stock markets, most investors realized
that these funds would not be able to make good their promises.
The Regulator steps in, and so do the foreigners
At this stage it also became apparent that the disclosure levels of mutual funds
were limited, there was no uniform method of computing Net Asset Values (NAV's) and these were
declared only annually. To instill confidence and to regulate the industry, SEBI notified
regulations bringing all mutual funds except UTI under a common regulatory framework.
Inflows into mutual funds spurted towards the end of FY1994 when private sector
mutual funds were allowed to be set up. Foreign asset management companies also set up joint
ventures to manage some of the domestic mutual funds. But this only gave the investors another
reason to be disillusioned.
Though the number of mutual funds had increased, investors were not educated
enough to understand the functioning of a mutual fund and the tools to be used to evaluate a
fund. Investors placed a high importance either on the reputation of the sponsor or on the
performance of the market prices of its previous schemes while ignoring the NAV completely.
Moreover mutual funds also failed to educate the investors about the characteristics of such
investments. As a result investors equated mutual fund offerings with share issues by companies
and expected large capital appreciation once these funds would be listed.
For instance, Morgan Stanley collected Rs 9.8 bn in early January 1994.
Investors were attracted to this fund because of the high pitch publicity with which it was
launched and the general impression of it being " Made in America". Unfortunately, the "global
vision, local knowledge" of many of these funds did not help the investors' returns.
To be fair, the period of rapid expansion of mutual funds also coincided with a
decline in stock prices. Also, since most mutual funds had made investments in smaller, less
liquid companies, the values of their portfolios fell faster than the overall Index levels.
Investors, hit by the 1992 scam, the lack of performance of the public sector funds and now the
failure of the foreign funds, retreated from the capital markets completely. Confidence in fund
managers eroded and investor perception turned increasingly negative. For most of 1996, 1997, and
1998 mutual funds found it increasingly difficult to raise new money from investors.
Light at the end of the tunnel?
The only way for mutual funds to raise resources was to focus on improving
performances and offer better products and services. With increasing competition and easier
regulations, mutual funds are making an effort to regain the confidence of the investors. Service
has improved and more types of funds are being offered. Mutual funds are now offering schemes
with features of reinvestment plans, systemic withdrawal plans, cheque facility for money market
funds, and switchover facility between the schemes to suit investor preferences. Industry
specific schemes are also available to the investors.