Recent Developments in Indian Mutual Fund Industry

The first mutual fund in India was set up in 1964 in the name of Unit Trust of India. There were no other mutual funds till 1987-88. In the year 1993, the mutual fund industry was thrown open for the private sector. The industry expanded fast during the 1990s.

There were 37 large mutual funds operating in India as at March 2002. These funds offer a variety of products through innovative schemes.

When the equity market in India was very active during 1997 -2000 due to fast growth of Indian technology sector, the mutual funds came out with sector specific funds such as Technology Fund, Income Fund, Liquid Fund, Media & Communication Fund, FMCG Fund (Fast Moving Consumer Group Products), Index Fund, Balanced Fund, Gilt Funds, etc.

As on March 2002, all the mutual funds put together operated as many as 417 Schemes to cater to the diverse needs of investors. During the stock market boom period the resources mobilized by mutual funds had gone up. During the period 1997 – 2002, mutual funds have mobilized nearly Rs. 40,000 crore from the market.

However, the fall in share prices during the past 2 years, had eroded a large part of wealth of investors. Mutual Funds’ which are managed by qualified Fund Managers and assisted by Investment / Security Analysts were no exception for erosion in unit value.

The biggest casualty in the mutual fund industry was Unit Trust of India (UTI). The asset under management of UTI which used to be around Rs. 65,000 crore in mid 1990s came down drastically to half its value due to fall in share prices. The assets under management of other mutual funds also similarly suffered heavily. In the process investors in mutual funds lost a large part of their wealth due to erosion in net asset value.

Many a Fund, particularly UTI which operated schemes with assured returns faced grave yard due to fall in interest rates and market price of shares. The downward trend in interest rates affected the capacity of funds to generate sufficient incomes to pay for assured return.

There were defaults in meeting the commitments by Funds. SEBI issued instructions banning assured return schemes. In the beginning of 2003, total asset under the management of mutual funds amounted to Rs. 1, 13,000 crore.

Net resource mobilization declined sharply during 1999 – 2002 due to poor performance of the stock market. The sharp decline in share prices drove the fund managers to shift more of their investment in debt related instruments.

Resources mobilized by Mutual Funds during 1995 to 2002 may be seen in the following table:

The Special case of UTI

UTI faced difficult situation during October 1998 and July 2001. In 1998 for the first time, the reserves of UTI’s main Scheme viz. US – 64 became negative. In the year 2000 – 01, UTI slashed dividend on its schemes and stopped repurchase under US 64.

This created a crisis of confidence and the trust of investors on the UTI started vanishing. Many institu­tional investors who happened to know the ailing condition of the Fund surrendered their holding of units for repurchase before UTI came out with the suspension of repurchase scheme.

These investors escaped from their losses as they had surrendered their units at a better rate ruling at that point of time before suspension of repurchase facility.

The crisis prompted the Government to advise splitting of the UTI schemes into 2 main schemes viz. US 64 and US 2002. The US 2002 scheme is an open-ended balanced scheme with daily sale and purchase at NAV based prices.

Thus investors in the scheme will not get any assured return or guarantee from government. The value of units will be based on stock market prices of securities in which the scheme has invested its funds.

The holders of US 64 scheme were divided into 2 groups viz. those who were having units up to 5000 (small investors) and others having units above 5000 as on a cut of date of June 30, 2001. The holders up to 5000 units were assured of Rs. 12 per unit (face value Rs. 10) for payment in May 2003.

For those whose holding exceeds 5000 units will get Rs. 12 per unit up to 5000 units and beyond that at face value. Further these holders were given option to get money at the price mentioned above or to convert their holding into 6.75 per cent tax free bonds. Thus US 64 scheme which was the investment avenue for lakh of small and retail investors had a fateful end in 2003.

Customer Service

“Customer is the most important visitor in our premises. He is not dependent on us. We are dependent on him. He is not an interruption on our work. He is the purpose of it. He is not an outsider on our business. He is a part of it. We are not doing him a favour by serving him. He is doing us a favour by giving us an opportunity to do so” said the Father-of-the Nation, Mahatma Gandhi long ago.

The Gandhi an concept of customer accepted by banks exhibit their customer orienta­tion. Transition of banks from class banking to mass banking and thrust upon profitability in recent period has led them towards customer orientation.

Now it is their duty to accept the principle of customer as “King” in service industry in the present era of cut-throat com­petition. With the advancement of science and technology, our world has reduced to a glo­bal village. Thus, change is, both inevitable, and desirable. In such a situation, customer orientation has become the key word for competitive success.