The financial services industry in the Indian economy is undergoing a sea change. One major change that has taken place in the last few years is the establishment of a large number of mutual funds. It is widely recognized that the mutual funds provide small investors the benefit of more efficient management of their investments. At the moment, only public sector banks and financial institutions are permitted to set up these funds. However, there is increasing pressure to allow such funds to be set up in the private sector. The time has therefore come to bring in appropriate legislation to govern the functioning of mutual funds. In this paper, we discuss the various issues connected with operation of mutual funds and then propose a set of regulations to ensure that they fulfil the role they are expected to. In proposing these regulations, we have drawn heavily upon the Investment Company Act of 1940, the US legislation on operation of investment companies.
