Market Survey

OctOber 2012 • FActS FOr YOU 7

By: Dr K. Balanaga gurunathan n.S. Santhi

TAX-SAVING MUTUAL FUNDS: A ThrIVING BUSINeSS read on to learn how the mutual funds industry monopolised by a government entity in India, grew to a thriving market with almost 50 private- and public-sector intermediaries.

Typically, a mutual fund scheme has a fund manager or investment advisor to manage the collected funds so it is also called a managed fund. The funds may be invested in long-term growth with a low risk for the investors. A few investors may be ready to take risks for high re-turns, in which case they will place their money in mutual funds that advertise high income growth with high risks.

For individuals, mutual funds are an easy way to invest because someone manages their funds, takes care of the accounts and invests their money in many different securities.

The trends in mutual funds

The mutual funds industry in India was established in 1963 by an act of parliament. It was set up by the Reserve Bank of India (RBI) and functioned under the regula-tory and administrative control of the RBI with a view of encourag-ing individual investors to save and benefit from the growth and profits accruing to companies.

The Unit Trust of India (UTI) was the first player in the mutual funds industry. In 1978, UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over its regula-tory and administrative controls. It was a one-entity industry till 1986, when UTI’s monopoly was broken—SBI and Canara Bank’s mutual funds were launched in De-cember 1987. This was followed by mutual funds from Punjab Nation-al Bank in August 1989, the Indian Bank in November 1989, Bank of India in January 1990, Bank of

A mutual fund is a trust that pools the savings of a number of inves-tors who share a com-mon goal. The money

collected from the public is invested in the capital market in different ways—in shares, debentures and other securities. Mutual funds offer individuals an opportunity to invest in diversified, professionally man-aged securities at a low cost.

Market Survey

8 FActS FOr YOU • OctOber 2012

Baroda in October 1992, the Life Insurance Corporation (LIC) in 1989 and the General Insurance Corporation (GIC) in 1990.

When the private sector entered the market, the industry’s growth accelerated. This also created the ne-cessity of regulations, under which all mutual funds except UTI were to be registered and governed.

Kothari Pioneer was the first private-sector mutual fund regis-tered in the year 1993. In 1996, the Securities and Exchange Board’s mutual fund regulations were for-mulated, in order to organise and monitor private mutual funds. The regulations were revised to help private investors. The opening up of the asset management business to the private sector allowed inter-national players like Morgan Stan-ley, Jardine Fleming, JP Morgan, George Soros and Capital Interna-tional to enter the Indian mutual fund industry by joining hands with domestic players.

There are currently 49 regis-tered asset management companies in India. Table I shows the tremen-dous growth of the mutual fund in-dustry. The number of players was 12 in 1994 and by 1999, due to the

potential and development within this sector, the number of interme-diaries increased to 41. There was a minor decline in the year 2000, when the number of players came down to 38 due to high volatility in the securities market. By August 2008, there were 40 players in the

market. The growth of the mutual fund market has also been shown in the chart below.

Tax-saving mutual funds

Tax-saving mutual funds are a type of equity linked savings schemes (ELSS) that operate with the aim of providing investors capital apprecia-tion through investments in equity shares and convertible debentures. The investment allocation could be from 80-100 per cent in equities and related instruments and 0-20 per cent in debt and related instru-ments.

The ELSS provide tax benefits under Section 80C of the Income Tax Act, 1961 for initial investments up to Rs 100,000. These schemes re-quire a minimum of Rs 500 as sub-scription with lock-in period of three years. These schemes have no entry and exit charges.

There are two types of tax-saving mutual fund schemes—the open-ended and closed schemes.

Table I

growth of Mutual Fund intermediaries in india

(Rs million)

Year Number of intermediaries

Assets under management

1999-2000 41 107,946

2000-01 38 90,587

2001-02 39 100,594

2002-03 38 109,299

2003-04 38 139,616

2004-05 37 149,600

2005-06 39 231,862

2006-07 38 326,292

2007-08 40 505,152

2008-09 44 417,300

2009-10 47 613,979

2010-11 51 592,250

2011-12 49 587,217

Source: SEBI bulletin from 1999-2012

Table II

tax-saving Mutual Fund Schemes

Year Open- ended

Closed- ended

Total

April 2012 36 13 49

April 2011 36 12 48

April 2010 36 12 48

April 2009 35 12 47

April 2008 30 11 41

April 2007 29 10 39

April 2006 26 9 35

April 2005 21 13 34

April 2004 20 19 39

April 2003 19 25 44

April 2002 18 36 54

April 2001 18 56 74

April 2000 12 53 65

Source: AMFI monthly reports from 2000-2012

growth of Mutual Fund intermediaries india

Source: SEBI Bulletin from 1999-2012

Market Survey

10 FACTS FOR YOU • OCTObeR 2012

Investors can enter and exit at any time in open-ended schemes, whereas it is restricted in close-ended schemes.

Table II shows the number of open-ended and close-ended tax-sav-ing mutual fund schemes over a peri-od of time. It shows that the number of open-ended schemes is increasing, whereas the number of closed-ended schemes has decreased.

Table III shows the asset values of tax-saving mutual fund schemes over the period 2005 to 2012.

Regulating authorities

SEBI is the apex institution con-troling and monitoring the securities market and mutual funds. The As-sociation of Mutual Funds in India (AMFI) also provides support for the development of mutual funds. SEBI and AMFI along with the AMCs have been organising a number of

awareness programmes to enhance the knowledge of investors about investment avenues and the funda-mentals of the market. The main aim of the controlling bodies is not only to develop the market but also to protect investors by providing ad-visory services and educating them in relevant areas.

Mutual funds are not risk-free investment avenues. The risks and returns depend on the movement of the stock market but the risks are diversified and reduced by investing pooled money into a number of sec-tors. Tax-saving mutual funds pro-vide market related returns along with tax protection for investors.

Dr K. Balanaga Gurunathan is profes-sor, department of Management Studies, KSR College of Technology, while N.S. Santhi is assistant professor, Department of Business Administration, KSR College of Engineering, Tiruchengode

Table III

Assets Under Manage-ment of Tax-Saving Mutual

Funds Schemes(Rs million)

Year Open- ended

Closed- ended

Total

April 2012 20,966 2459 23,425

April 2011 22,513 2942 25,455

April 2010 21,328 3157 24,485

April 2009 12,217 2050 14,267

April 2008 14,734 3047 17,781

April 2007 9198 1859 11,057

April 2006 5624 1531 7155

April 2005 728 935 1663

April 2004 511 1144 1655

April 2003 373 838 1211

April 2002 427 1085 1512

April 2001 355 1952 2307

April 2000 600 1747 2347

Source: AMFI monthly reports from 2000-2012