Introduction and Objectives Mutual Funds are institutions that collect money from several sources individuals, corporate

e investors, NRI and FII and invest the money in a range of financial instruments falling into two broad categories Debt and Equity all for a fee. The investors gain from the fund managers experience and skill in identifying and choosing the best investment options. This saves them time and money. The Indian mutual fund industry was initially envisaged to address the gap between investments and savings level in the households. In 1963 by an act of parliament, the Unit Trust of India (UTI) was set up by the government of India to act as an intermediary between small investors and capital markets. UTI introduced a variety of products to mobilize savings and deploy them into development projects. In 1987, the mutual fund industry was opened up to the public sector banks and insurance companies. In 1992, the foreign and private sector mutual funds were also allowed to participate. Since then an increasing participation in the mutual fund industry has been observed increasing competition and a wider choice of products for investors. This report seeks to chart the growth story of the mutual fund industry in recent years, in terms of growth of asset management companies (AMC), assets under management (AUM) and the profile of investors. Identifying the key economic factors influencing the industry growth in debt and equity capital markets and their impact on industry profitability, structure (level of concentration). The regulatory framework governing the industry. The analysis would identify the key challenges and issues that face the industry today and a set of recommendations that would help mitigate these challenges in future.

Challenges The increasing regulations and growth in number of AMCs has put an increasing pressure on operational efficiency. The cost structure of AMCs shows increasing administrative and other expenses section as percentage of AUM. Though AMCs have been known to outsource their registration, custodianship and transfer activities so that they may focus primarily on core functions like product development and distribution, cost effectiveness is a focus area especially given the narrow profitability margins characteristic of the industry.

Penetration remains a key challenge for most AMCs as the metro cities still make up a major chunk of the investor base. Retail penetration in particular needs to be pushed. The lack of awareness and financial education about mutual funds remains a deterrent. Furthermore, public sector banks having a larger customer base in beyond the metros have played a limited role in mutual find distribution so far. They enjoy a credibility which is has been left unharnessed thus far with regards to mutual funds.

Varying regulatory frameworks and compliance requirements in the financial services industry especially amongst mutual funds, insurance and pension funds each of which vie for the same share of the customers funds placed the mutual fund industry at a disadvantage. For example, a PAN card is a mandatory requirement for investing in mutual funds but not so for investing in unit linked insurance plans (ULIP) whereas these are considered competing products.

Recommendations The distribution base of AMCs needs to be expanded on a larger scale. Massive customer awareness campaigns and educational sessions on financial planning need to conducted especially in the tier 2 and 3 cities. This would mobilize the untapped savings investment mismatch to a greater extent and serve as a key growth driver for the gross AUM. In order to promote distribution, an incentive plan for distributors in the form of pricing flexibility for varying services provided by the distributors may be devised. Distributor compensation structure should include more flexibility allowing customers to pay for the services rendered. Open up the distribution and investor service activities in tier 2 and 3 cities with the help of public sector banks, cooperative banks and rural banks. This would help harness the reputation of public sector institutions and investor confidence in investing in mutual funds.