They used to be an avenue of mutual gains for investors in both good times and bad for years, but incurred heavy losses in 2008, when mutual funds became poorer by about Rs 1,50,000 crore or about a third of their total size.
Such has been the impact of these losses, which accounted for nearly three-fourths of the overall gains in the previous year 2007, that investor confidence got shattered in just a few months of downturn.
In contrast, it had taken five years to gauge the success of the world's first mutual fund, launched by Massachusetts Investment Trust, in 1925, and to gain the confidence to grow beyond a single fund.
Moreover, this confidence came only after the first fund survived the stock market crash of 1929 and came out with positive returns for the investors.
The mutual fund industry in India, with nearly 36 members, was regarded as a safe avenue of mutual gains for investors till 2007 — when their total wealth grew by more than Rs 2,30,000 crore to Rs 5,50,000 crore.
However, the stock market downturn, beginning early in 2008, wiped off close to Rs 1,50,000 crore this year, bringing its asset size to nearly Rs 4,00,000 crore and leaving the industry shattered with a huge liquidity crunch.
But the industry, where players operate with catchlines like "Let's plan to get rich" and "Reaching new heights", hopes its fortunes will revive in 2009 and it will regain retail and corporate investors' confidence.
"We believe 2009 will be a better year and the mutual fund industry would bounce back with general improvement in liquidity and economy as government measures would promote growth, while the overall market sentiment is likely to change from January onwards," Association of Mutual Funds Chairman A P Kurien said.
Mutual funds are likely to resume growing in a robust manner by April-June 2009 as equity markets are expected to improve by then, Kurien said, adding that the Rs 20,000 crore support given by the government helped in avoiding a crisis situation for the industry.
"We started the year on a extremely optimistic note and are ending it on an extremely pessimistic edge. It has been the worst calendar year for the market as the magnitude of losses have been huge," Mutual Fund tracking firm ValueResearch Online CEO Dhirendra Kumar said.
However, the weak close to the year could provide an excellent ground for rebuilding "as this is the appropriate time for investors to buy for the long term", he added.
"The fallout from the downtrend is positive as the investor attitude is changing gradually, which would transform the mutual fund industry," Kumar said.
Market regulator Sebi has issued guidelines to protect mutual funds and investors from sudden redemptions, such as asking funds to list closed-end schemes and disallowing exit from schemes before maturity.
The decision came in the wake of a liquidity crisis faced by the industry two months ago as investors pulled out from fixed-income funds fearing a liquidity crunch.
Probably on account of this, the industry saw new fund houses entering or planning to enter the space this year. These included Bharti AXA, Edelweiss Mutual Fund, India Infoline, Religare, Aegon and Peerless.
