P Kurian, chairman, AMFI, and former executive trustee,
UTI, looks at the Indian mutual funds sector
funds are the fastest growing segment of the financial
services sector in India. During the last year, the
assets managed by the industry have grown from Rs87,000
crore to Rs 1.55 lakh crore.
Rs87,000 figure itself is significant, since in the
previous year the Unit Trust of India was split into
two and Rs30,000 crore went out of the mutual funds
industry along with the government-administered UTI-1.
personally visualise a minimum annual growth of between
30 and 35 per cent, since we are on a growth phase (a
real take off, if I may venture to say) as penetration
into semi-urban and rural areas is steadily increasing
since more and more households are opting for mutual
mutual fund industry in India started in 1964, thanks
to the vision of the then finance minister, the late
T T Krishnamachari (TTK) who wanted to create an institution
that would channelise the funds of small investors into
the capital market. The government engaged David Silver,
known as the father of mutual funds, as one of the consultants,
to create a mechanism and devise an instrument for these
envisaged 40 years ago, UTI evolved as a government
promoted organisation, which combined in itself the
functions of a mutual fund and a financial institution.
As a result, UTI was allowed to participate in term
financing, which today's mutual funds do not do. Its
activities as a financial institution were in keeping
with the ethos of the times, which required us to promote
industries and also promote the capital markets. By
1987, UTI was managing assets worth Rs 40,000 crore.
That was the first phase of the mutual fund sector in
second phase of the sector's growth came in 1987 with
the entry of government-owned banks and financial institutions
like the Life Insurance Corporation, the General Insurance
Corporation, the State Bank of India, Canara Bank, Punjab
National Bank and others being permitted to set up their
own mutual funds. With their entry, mutual funds started
penetrating the semi-urban and rural areas and by 1993,
the mutual fund market had grown to about Rs80,000 crore.
in 1993, came the liberalisation policy, under which,
mutual funds were one of the early sectors to be opened
to private and foreign participation. As a result, most
of the leading foreign funds have set up their operations
in the country. This phase has brought many advantages
such as high benchmarks in quality and customer service,
which are comparable to the best in the world. Consequently,
the sector has grown rapidly and is today worth Rs1.4
Keeping pace with the growth, a stringent regulatory
framework has evolved. It started with the promulgation
of the Mutual Fund Regulation Act 1993, amended in 1996,
which lays down the regulatory framework and extensive
operational details for the functioning of these funds.
the Association of Mutual Funds of India (AMFI), helped
create regulatory and disclosure norms that could match
with the best in the world. We have evolved standards
and practices of professional and ethical conduct in
every area starting from the wording of offer documents,
disclosures, transparency, and valuations the
heart of mutual funds to training intermediaries
who are the sellers of mutual funds, and a code of conduct
within which to operate.
I must say very humbly, thanks to the people around
AMFI, all these steps have contributed to the enormous
acceptance of the wide variety of innovative products
tailored by mutual fund houses to suit the varied needs
of the entire investment community for children,
couples, parents or the aged and the retired.
fact, we now have, perhaps, the world's best array of
products ranging from conventional products like growth
and income schemes to sophisticated products like index
funds, sector specific products and what is called new
generation products like exchange traded funds which
are funds traded on the exchanges. Right now, an AMFI
committee is exploring the possibility of funds to invest
in commodity futures and capital guaranteed products.
in an industry where lakhs of applications are processed,
there can always be a slip up, a mistake or an error.
Some time ago, the newspapers had reported the switching
of shares by a mutual fund. Subsequent investigations
revealed the switch was caused by a transaction error.
lakhs of applications are processed at various levels
the branch, the registrar's office or the front
office an entry may some times be wrongly entered
or missed out altogether. However, what was encouraging
was that it was detected purely through the internal
control system of the fund and rectified immediately.
internal controls and monitoring exist at three levels
the directors of the asset management company,
the trustees of the funds who have fiduciary responsibility
and SEBI to whom daily, weekly, fortnightly, monthly,
quarterly and annual reports are provided, the scope
for wilful misconduct becomes extremely difficult. That
is why the error was detected within a matter of days
and remedial action was initiated instead of being swept
under the carpet.
Investor protection needs to be understood in its totality,
since there are different dimensions to it. What is
protection? Can a body protect you? Or does it help
you to protect yourself? Protection has to be differentiated
from guarantees and assurances. To my mind protection
can be ensured through policies, systems, practices
and procedures being followed meticulously so that the
interest of the investor is protected.
is the investor's interest? That his money is handled
responsibly, and the capital is protected through proper
controls; investments guidelines and; the investor's
right to know where his money is being invested and
how it is being used. The funds have to disclose periodically
how they invest the funds.
stipulations create built-in protection, and by and
large, we have noticed that individual fund managers
act responsibly and within the specified standards.
Since laws set the limits, the mutual fund industry
tends to practice a more transparent, open book approach.
form of protection is ensuring easy encashability, if
the investor wishes to withdraw from a fund. Investors
want their returns to be protected. But mutual funds
are not permitted to offer guaranteed returns like a
fixed deposit. Last year most, if not all, diversified
equity funds have given 100 per cent returns without
having guaranteed such returns. This is an excellent
way of protecting the investor interest.
finally, the investor is required to be protected from
procedural or systemic failures or breakdown
such as when an investor moves residence, and the new
address is not recorded with the fund. This is where
benchmarks and best practices play an important role
plus, of course, the competitive pressure among the
29 mutual fund companies to provide highest service
AMFI, our role is to set the standards in valuations,
accounting, construction of NAVs, disclosures and guidelines
for investment and limits to exposure in individual
companies. The financial services sector functions on
the basis of trust and confidence, and, confidence is
best established through transparency, responsibility
and ethical conduct, without exaggerated promises of
appreciation or return.
feel that the sector has a very interesting past, an
encouraging present and a very bight future.
author was formerly executive trustee of Unit Trust
of India and is currently the chairman of the Association
of Mutual Funds of India.)