Mutual funds are a significant source of investment in both government and corporate securities. The largest mutual fund is Unit Trust of India (UTI), which was set up by the government in 1964 to encourage small investors to invest in the equity market. UTI has an extensive marketing network of over 35,000 agents spread throughout the country.
Today, numerous mutual funds exist, including private and foreign companies. A variety of schemes exist, both open-end and closed-end. All MFs are allowed to apply for firm allotment in publlic issues. The functioning of mutual funds is regulated by SEBI. SEBI regulations require that all Mutual Funds (MF) be established as trusts under the Indian Trusts Act, while the actual fund management activity is conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be penalised for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI.
Till recently, only mutual funds set up by the public sector banks were allowed to operate as lenders in the call/notice money/reiscounting market. The Credit Policy: First Half announced on 17th April 1995 has provided access to mutual funds set up in the private sector and approved by SEBI only as lenders in call/notice money/bill rediscounting market, prior permission however would be required from the RBI.
To improve the scope of investments by MFs, funds were permitted to underwrite public issues, and the guidelines for investments in money market instruments were relaxed.
Foreign participation in mutual funds and asset management companies is permitted on a case by case basis.
Centre for Monitoring Indian Economy, Bombay
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Last updated: August 1995.