Mutual fund industry in India

The mutual fund industry in India encompasses all asset management companies (AMCs), schemes, and intermediaries that pool capital from retail and institutional investors to invest in securities markets under the regulatory oversight of the Securities and Exchange Board of India. As of March 2024, the industry managed assets under management (AUM) exceeding Rs 53 lakh crore (approximately USD 640 billion), spread across 44 SEBI-registered AMCs offering more than 1,500 distinct schemes. The industry serves over 180 million unique investor folios and channels a significant share of domestic household savings into equity and debt capital markets.

India’s mutual fund history spans six decades, beginning with the formation of the Unit Trust of India in 1963 as a statutory body under an Act of Parliament and evolving through multiple phases of liberalisation, privatisation, and regulatory codification. The Securities and Exchange Board of India assumed regulatory authority over mutual funds in 1993, and its comprehensive Mutual Fund Regulations of 1996 remain the primary statutory framework governing scheme categories, disclosures, investment restrictions, and investor protection norms. The Association of Mutual Funds in India (AMFI) functions as the industry’s self-regulatory organisation, maintaining distributor registration (ARN), publishing daily NAV data, and disseminating aggregate industry statistics.

Systematic investment plans (SIPs) have emerged as the defining retail distribution mechanism of the 2010s and 2020s, aggregating monthly inflows of Rs 19,000–21,000 crore by early 2024. Exchange-traded funds (ETFs) and index funds have expanded rapidly, driven in part by the Employees’ Provident Fund Organisation (EPFO) mandating passive equity allocations from 2015 onward. Direct plans, introduced compulsorily from 1 January 2013, have grown to represent a substantial share of AUM in institutional and fee-sensitive investor segments, while the regular plan channel continues to dominate retail distribution through banks and independent financial advisers.

Historical development

Phase I: UTI monopoly (1963–1987)

The Unit Trust of India was established under the Unit Trust of India Act, 1963, as a joint initiative of the Government of India and the Reserve Bank of India. UTI’s US-64 scheme, launched in 1964, was for decades the largest single pooled investment vehicle in India and the primary instrument through which small investors accessed capital markets. During this phase, UTI operated without competition and without the disclosure standards later mandated by SEBI. The trust’s governance structure was quasi-governmental, with its chairman appointed by the government and its investment decisions subject to implicit policy direction.

UTI accumulated a large retail investor base through its branch and agent network. By the late 1980s, US-64 alone held tens of millions of unitholder accounts. However, the absence of mark-to-market NAV calculation and the offering of guaranteed or assured returns on certain schemes laid the groundwork for the liquidity crisis that surfaced in 2001–2002.

Phase II: Entry of public sector banks (1987–1993)

The Government of India allowed public sector banks and insurance companies to establish mutual fund entities in 1987. SBI Mutual Fund, sponsored by State Bank of India, became the first non-UTI mutual fund in June 1987. Canara Bank, Punjab National Bank, Indian Bank, Bank of Baroda, Bank of India, and Life Insurance Corporation of India followed with their own sponsored AMCs. These entities operated under Reserve Bank of India and Ministry of Finance guidelines rather than a unified securities regulator.

This phase saw the launch of equity growth funds, income funds, and balanced funds by multiple entities, increasing investor choice but without standardised disclosure requirements. The absence of NAV-linked redemption across some schemes and the opaque management of certain guaranteed return products remained structural weaknesses.

Phase III: Private sector entry and SEBI regulation (1993–2002)

The enactment of the Securities and Exchange Board of India Act, 1992, and the promulgation of the SEBI (Mutual Funds) Regulations, 1993, opened mutual fund registration to private sector entities. Kothari Pioneer (later absorbed into Franklin Templeton), Morgan Stanley, and Alliance Capital were among the earliest private AMCs to receive SEBI registration. The 1993 regulations were superseded by the comprehensive SEBI (Mutual Funds) Regulations, 1996, which remain in force (with numerous subsequent amendments).

The 1990s saw significant market volatility, including the Harshad Mehta securities scam of 1992, which affected many market participants. Several assured-return schemes launched by public sector AMCs in the early 1990s subsequently faced redemption pressure as equity markets declined. The UTI crisis deepened through the late 1990s as US-64 continued to offer income distributions out of line with its underlying portfolio performance.

Phase IV: UTI bifurcation and consolidation (2002–2012)

The US-64 crisis came to a head in 2001–2002 when UTI suspended redemptions. The government responded by bifurcating UTI under the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. The restructured portion containing assured-return and government-backed schemes was placed in a Specified Undertaking of UTI (SUUTI) under government administration, while the market-linked schemes were transferred to UTI Mutual Fund, a new entity registered under the SEBI Mutual Fund Regulations and sponsored by four public sector institutions (State Bank of India, Punjab National Bank, Bank of Baroda, and Life Insurance Corporation of India).

The same period saw consolidation among private AMCs. Alliance Capital exited the Indian market; several smaller entities merged with larger peers. Foreign financial institutions including Fidelity, ING, Deutsche Bank, and HSBC established or expanded Indian AMC operations. The introduction of the entry load and later its abolition by SEBI in 2009 reshaped distribution economics significantly.

SEBI’s abolition of the entry load (upfront commission charged to investors) with effect from 1 August 2009 was one of the most consequential regulatory changes of this phase. It disrupted traditional distribution economics and led to a temporary slowdown in retail inflows, but ultimately improved investor outcomes by aligning distribution incentives with long-term performance rather than upfront sales.

Phase V: Direct plans, SIP growth, and passive revolution (2013–present)

The introduction of mandatory direct plans from 1 January 2013 created a separate, lower-expense class for every scheme, enabling cost-conscious investors and Registered Investment Advisers (RIAs) to bypass commission-paying intermediaries. SEBI’s scheme categorisation and rationalisation circular of October 2017 (effective from April 2018) required all AMCs to limit their offerings to defined categories with standardised investment mandates, reducing the total number of schemes while clarifying comparative benchmarking.

The Pradhan Mantri Jan Dhan Yojana (2014) and Aadhaar-linked KYC (2015 onward) expanded the addressable investor universe. SIP monthly inflows crossed Rs 10,000 crore in 2018, Rs 15,000 crore in 2022, and Rs 20,000 crore in 2023, reflecting the normalisation of equity mutual funds as a household savings vehicle. EPFO’s decision to invest 15% of its incremental corpus in equity ETFs from 2015, channelled through SBI Mutual Fund and UTI Mutual Fund, created a large and steady flow into passive instruments.

The Covid-19 pandemic period (2020–2021) brought a stress test: Franklin Templeton wound up six debt schemes in April 2020 citing redemption pressures, triggering significant regulatory scrutiny of liquidity risk management in open-ended debt funds. SEBI subsequently tightened liquidity norms for debt mutual funds, including mandatory deployment of swing pricing mechanisms.

Regulatory framework

SEBI (Mutual Funds) Regulations, 1996

The primary regulatory instrument is the SEBI (Mutual Funds) Regulations, 1996, as amended through numerous SEBI circulars and notifications. The regulations prescribe the three-tier structure (sponsor, trustee, AMC), minimum net worth requirements (Rs 50 crore for AMC), investment restrictions (diversification limits, single-issuer caps, sector caps), disclosure obligations (scheme information documents, key information memorandums, periodic portfolio statements), and valuation methodology (daily mark-to-market for most instruments).

Key regulatory provisions include:

• Sponsor criteria: Sponsors must demonstrate a track record of at least five years in financial services and maintain a minimum 40% shareholding in the AMC (since relaxed to allow dilution through market listings).
• Trustee independence: The board of the trustee company must have a majority of independent directors; trustees exercise fiduciary oversight over the AMC.
• Investment restrictions: No scheme may hold more than 10% of its NAV in securities of a single issuer (with certain exceptions for government securities and index funds); sector exposure in equity schemes is capped at 25% of NAV.
• NAV publication: AMCs must publish daily NAVs by 9 pm (for most schemes), with real-time disclosure obligations for liquid and overnight funds.
• Total expense ratio (TER) limits: SEBI prescribes TER caps on a sliding scale based on AUM, with lower caps for direct plans and larger fund sizes.

Scheme categorisation (2017 circular)

SEBI’s October 2017 circular on scheme categorisation mandated that each AMC offer at most one scheme per defined category, with clear asset allocation ranges and benchmark criteria. The categories include:

• Equity schemes: Large cap, mid cap, small cap, large and mid cap, flexi cap, multi cap, ELSS (equity-linked savings scheme), focused fund, value/contra, dividend yield, sectoral/thematic.
• Debt schemes: Overnight, liquid, ultra short duration, low duration, money market, short duration, medium duration, medium to long duration, long duration, dynamic bond, corporate bond, credit risk, banking and PSU, gilt, gilt with 10-year constant duration, floater.
• Hybrid schemes: Conservative hybrid, balanced hybrid, aggressive hybrid, dynamic asset allocation/balanced advantage, multi-asset allocation, arbitrage, equity savings.
• Solution-oriented schemes: Retirement fund, children’s fund (with lock-in provisions).
• Other schemes: Index funds, ETFs, fund of funds (domestic/overseas).

This rationalisation reduced scheme count substantially and improved comparability across AMCs.

AMFI and intermediary regulation

The Association of Mutual Funds in India, incorporated in 1995, is a non-profit industry body representing all SEBI-registered AMCs. AMFI administers the AMFI Registration Number (ARN) system, which requires all mutual fund distributors to qualify the NISM Series V-A examination and renew their registration every three years. AMFI publishes monthly and annual AUM data, SIP inflow statistics, scheme-level AUM, and folios data, which serve as the industry’s primary public statistics.

Mutual fund distributors (operating under ARN) receive trail commissions from AMCs on regular plan investments. Registered Investment Advisers (RIAs), regulated directly by SEBI under the Investment Advisers Regulations, 2013, charge advisory fees from clients and typically recommend direct plans. Stock exchange platforms (NSE’s NMF II, BSE StAR MF) enable online transaction infrastructure accessible to distributors and direct investors.

Industry structure and participants

AMC landscape (2024)

As of March 2024, SEBI recognised 44 active AMCs. The industry is concentrated at the top: the top-10 AMCs by AUM account for approximately 85% of industry assets. The largest AMC, SBI Mutual Fund, manages over Rs 9 lakh crore. HDFC Mutual Fund, ICICI Prudential Mutual Fund, Nippon India Mutual Fund, and Kotak Mahindra Mutual Fund follow in the top tier.

Sponsor categories span public sector banks (SBI, Canara, Bank of Baroda, Bank of India), private sector banks (HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, IDBI Bank), domestic conglomerates (Aditya Birla Group, Tata Group, DSP Group), insurance companies (LIC), and foreign financial institutions (Mirae Asset, HSBC, Franklin Templeton, Invesco).

Registrar and transfer agents

Two RTAs dominate mutual fund investor servicing: Computer Age Management Services (CAMS) and KFin Technologies (formerly Karvy Computershare, acquired by KKR). CAMS, listed on the National Stock Exchange in 2020, services the majority of AMCs. KFin Technologies, listed in 2022, services the remainder. Both RTAs maintain centralised investor databases, process transactions, issue account statements, and support KYC verification in conjunction with KYC Registration Agencies (KRAs).

Custodian and depository linkages

Mutual fund scheme assets are held in segregated custody accounts at SEBI-registered custodians, principally Deutsche Bank, HDFC Bank, Citibank, and ICICI Bank. Equity and debt securities held by schemes are dematerialised and held in the scheme’s demat account with either NSDL or CDSL.

AUM growth and investor participation

India’s mutual fund AUM grew from approximately Rs 7 lakh crore in March 2014 to Rs 53 lakh crore in March 2024, a compound annual growth rate exceeding 22%. The growth reflects a confluence of factors: rising household income, post-demonetisation formalisation of savings, digital onboarding (including Aadhaar-based e-KYC), and the normalisation of SIP investing through sustained awareness campaigns including AMFI’s “Mutual Fund Sahi Hai” initiative launched in 2017.

Equity-oriented schemes account for approximately 58% of total AUM (March 2024), reflecting the equity market’s outperformance over the period and the maturation of long-duration SIP investors into significant accumulated corpus holders. Debt and liquid/money market schemes account for most of the remainder, with hybrid and solution-oriented schemes making up a smaller share.

B30 cities (cities beyond the top 30 by population) have been a focus of regulatory policy aimed at expanding the investor base beyond the six largest metropolitan agglomerations. SEBI offers additional TER allowances for inflows from B30 locations, incentivising AMCs and distributors to develop non-metro channels.

Taxation of mutual fund investments

The taxation of mutual fund investments is governed by the Income Tax Act, 1961, and amended by successive Finance Acts. The key parameters (as of the Finance Act, 2023) are:

• Equity-oriented funds (holding 65% or more in equity): Short-term capital gains (STCG, holding period less than 12 months) taxed at 15% under Section 111A; long-term capital gains (LTCG, holding period 12 months or more) taxed at 10% on gains exceeding Rs 1 lakh per year under Section 112A without indexation benefit.
• Debt funds: With effect from 1 April 2023 (Finance Act, 2023), gains from debt mutual funds (holding less than 35% in equity) are taxed as short-term capital gains at the applicable slab rate, regardless of holding period, removing the earlier benefit of LTCG with indexation.
• Hybrid funds: Tax treatment depends on actual equity allocation; balanced advantage and aggressive hybrid funds with 65%+ equity qualify as equity-oriented for tax purposes.
• ELSS: Investments up to Rs 1.5 lakh per year qualify for deduction under Section 80C; LTCG on redemption taxed at 10% on gains exceeding Rs 1 lakh; mandatory 3-year lock-in period per SIP instalment.
• Dividend income: Dividends (distributed by “IDCW” or Income Distribution cum Capital Withdrawal option schemes) are taxable in the investor’s hands at applicable slab rates under Section 2(22) as modified after the dividend distribution tax abolition in the Finance Act, 2020.

Securities Transaction Tax (STT) at 0.001% applies on equity mutual fund redemptions. Capital gains reporting is typically reflected in the Annual Information Statement (AIS) and may require disclosure in ITR-2 or ITR-3 depending on investor category.

Key regulatory events and controversies

Assured-return schemes and their aftermath

Several public sector AMC-sponsored assured-return schemes of the early 1990s resulted in large investor losses when the guaranteeing institutions (typically sponsor banks) faced constraints in honouring guaranteed returns. SEBI subsequently prohibited assured or guaranteed returns except under specific conditions.

Mis-selling and distributor incentive issues

The practice of upfront commissions and incentive tours to distributors was a recurring concern through the 2000s. SEBI’s 2009 abolition of entry loads, followed by progressive tightening of upfront commission caps and the 2018 ban on upfront commissions for SIPs, aimed to curb churn-driven mis-selling.

Franklin Templeton debt fund closures (2020)

In April 2020, Franklin Templeton India wound up six open-ended debt schemes citing liquidity constraints exacerbated by the Covid-19 market dislocation. The episode was the largest fund closure in Indian mutual fund history and prompted extended judicial and regulatory scrutiny, investor litigation, and eventual orderly distribution of recovered assets over 2021–2023. SEBI subsequently mandated liquidity stress testing and swing pricing for debt funds.

Quant Mutual Fund SEBI investigation (2024)

SEBI conducted searches at the premises of Quant Mutual Fund in June 2024 in connection with an alleged front-running investigation. The investigation was ongoing as of mid-2024, and Quant MF continued operations during this period.

Market-linked debentures and side-pocketing

SEBI mandated side-pocketing provisions in 2018, allowing AMCs to segregate distressed credit assets within debt schemes into a separate portfolio, protecting liquid investors while preserving economic rights for continuing investors. Several AMCs exercised this provision following credit events at IL&FS, DHFL, Essel Group, and YES Bank-related papers between 2018 and 2021.

Passive funds and ETFs

The ETF segment, dominated by government-mandated EPFO investments in equity ETFs, has grown to represent a significant share of total AUM. Nifty 50 and Sensex index funds and ETFs from SBI Mutual Fund and UTI Mutual Fund are among the largest scheme-level AUM pools. The Bharat Bond ETF series, managed by Edelweiss AMC on behalf of government-owned corporations, created a novel AAA-rated corporate bond ETF category.

Low-cost index investing has been popularised by Zerodha’s Coin platform (see Zerodha Mutual Fund), PPFAS, and Quantum Mutual Fund, and has gained significant mindshare among retail investors following the global evidence on passive outperformance of active management over long horizons.

International linkages

India’s mutual fund industry operates with regulated limits on overseas investments. AMCs may invest in foreign securities, overseas ETFs, and ADRs/GDRs within an overall industry limit of USD 7 billion (individual AMC limit of USD 1 billion), subject to periodic SEBI/RBI guidance. Several India-domiciled funds of funds invest in overseas equity mutual funds, providing Indian investors exposure to global markets. Conversely, foreign portfolio investors (FPIs) may invest in Indian mutual fund debt schemes within limits specified under the FPI regulations.

Distribution channels

Bank-led distribution

Large private sector and public sector banks are the primary distribution channel for retail mutual fund assets. Bank relationship managers and wealth management arms channel customer savings into mutual fund products, predominantly through regular plans earning trail commissions. This channel dominates gross inflows in the savings and wealth management segments.

Independent financial advisers and distribution firms

National distributors (NDs) such as NJ India Invest, IIFL Wealth (now 360 ONE Wealth), and Anand Rathi Wealth, as well as regional mutual fund distributors, form the backbone of non-bank retail distribution. NJ India Invest, through its NJ Mutual Fund subsidiary (the AMC arm registered after 2020), is notable for having originated as a distributor before launching its own fund house.

Digital and direct platforms

Fintech platforms (Groww, Paytm Money, ET Money, INDmoney, MFU) have captured a growing share of direct plan investments from digitally active investors. Zerodha Coin offers zero-commission direct mutual fund investment on the Coin platform, targeting self-directed investors. These platforms collectively account for a significant and growing share of new folios and SIP registrations.

SIP automation

The National Payments Corporation of India’s UPI AutoPay infrastructure and NACH (National Automated Clearing House) mandates have enabled seamless SIP automation. Monthly SIP accounts exceeded 80 million by early 2024. The average SIP ticket size has declined as lower-income and younger investors enter the market via digital platforms, while total monthly SIP flows have nonetheless risen due to the increasing count.

See also

• Mutual fund
• SBI Mutual Fund
• HDFC Mutual Fund
• ICICI Prudential Mutual Fund
• Nippon India Mutual Fund
• UTI Mutual Fund
• Unit Trust of India
• Franklin Templeton winding-up (2020)
• SEBI
• Capital gains tax in India
• Annual Information Statement
• Zerodha Mutual Fund
• National Stock Exchange
• Reserve Bank of India

References

1. SEBI (Mutual Funds) Regulations, 1996 (as amended). Securities and Exchange Board of India. Available at sebi.gov.in.
2. AMFI Monthly Data, AUM and Folios, March 2024. Association of Mutual Funds in India. Available at amfiindia.com.
3. SEBI Circular on Categorisation and Rationalisation of Mutual Fund Schemes, 6 October 2017 (SEBI/HO/IMD/DF3/CIR/P/2017/114).
4. Report of the Expert Committee on Mutual Funds (Tarapore Committee), 2000. Ministry of Finance, Government of India.
5. Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. Government of India.
6. SEBI Annual Report 2022-23. Securities and Exchange Board of India.
7. AMFI Annual Report 2022-23. Association of Mutual Funds in India.
8. SEBI Circular on Swing Pricing for Mutual Funds, 23 September 2021 (SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/576).
9. Finance Act, 2023. Ministry of Finance, Government of India (amendments to Section 50AA, Income Tax Act, 1961, debt fund tax treatment).
10. “Mutual Funds Sahi Hai” campaign launch press release, AMFI, March 2017.