banks could potentially face a large liquidity risk. in this connection, rbi had announced in the monetary policy on may 3, 2011 that the bank ’ s investment in debt oriented mutual funds to be capped at 10 per cent of net - worth as on march 31 of the previous year and banks would be given a period of six months to achieve this limit. from a prudential perspective, there is the possibility of banks ’ investments in the mutual funds getting channelized to sensitive sectors such as real estate and stocks. this may lead to banks ’ exposure to such sensitive sectors going beyond the prescribed prudential limits. iv. mutual funds and inclusion the role of mutual funds in promoting savings continues to be insignificant in india. despite a long history, assets of mutual funds in india constitute less than 10 per cent of gdp. a cross - country comparison suggests that mutual funds are very popular all over the world. source : amfi. bis central bankers ’ speeches however, assets under them in india are relatively low as compared with other emerging market economies. one of the major reasons for relatively low activity of mutual funds in india is that penetration, especially in the rural areas remains small. this is an important issue from the perspective of financial inclusion of low - income households in the formal financial system. it is generally perceived that mutual funds are popular mainly with the middle and high - income groups and have not been found to be an attractive investment avenue for the low - income groups. thus, if the sector has to grow fast, it needs to devise appropriate schemes to attract the saving of low - income groups, especially in rural areas. this is the only way to ensure participation of all categories of investors in the financial markets, which is crucial for sustained development, both of the financial sector and the economy as a whole. v. concluding remarks mutual funds clearly have a significant role to play in financial development. their modus operandi of aggregating pools of saving from a large number of retail investors and deploying these resources in a variety of financial markets, based on different risk - return preferences simultaneously enhances efficiency, stability and inclusion. it is also relatively easy for them to be transparent about both their strategies and outcomes. this, of course, is a statement of ideal conditions. in the real world, there are clearly barriers to achieving these objectives. some of these have to do with penetration, others with the preferences of investors, particularly with respect to duration, some more with legitimate regulatory concerns about systemic risk

by the reserve bank in april 1992. the reserve bank had made several modifications in the scheme to make it more flexible and attractive to banks and financial institutions. these guidelines were subsequently incorporated into the revised sebi regulations. in october 1997, mmmfs were permitted to invest in rated corporate bonds and debentures with a residual maturity of up to one year, within the ceiling existing for commercial paper ( cps ). the minimum lock - in period was also reduced gradually to 15 days, making the scheme more attractive to investors. bis central bankers ’ speeches mmmfs have witnessed phenomenal growth over the period. as on may 31, 2011, the total assets under management of the mmmfs was placed at rs. 1, 83, 622 crore 1, 25 per cent of the aggregate assets under management of the mutual funds. in order to promote retail holding in government securities and broaden the investor base, mutual funds which invest exclusively in government securities, gilt funds, were introduced. the first gilt fund in india was set up in december 1998. however, gilt funds have registered moderate growth. as on may 31, 2011, the total assets under management of the gilt funds was placed at rs. 3, 336 crore 2, 0. 5 per cent of the aggregate assets under management of the mutual funds. mutual funds occupy a large share of the primary market of certificates of deposit ( cds ) and cps. as on june 10, 2011 3, the total holdings of mutual funds in cds and cps remained at rs. 2, 95, 164 crore ( 66 per cent of the aggregate outstanding ) and rs. 82, 951 crore ( 65 per cent of the aggregate outstanding ) respectively. mutual funds have also provided substantial liquidity to the secondary market segments of cps and cds. their increased activity in the secondary market corresponds to their growing portfolio of money market investments. during the last six months, mfs ’ share in the daily turnover the secondary market of cds and cps stood at around 41 per cent and 46 per cent respectively. the overnight segment of the money market has also benefitted from the participation of mutual funds. their reliance on the collateralized segment of the overnight markets, viz. market repo and collateralized borrowing and lending operations ( cblo ), for placement of their daily surplus liquidity enhanced the depth of the markets. by contrast, in the government securities market, the participation of mutual funds has not been very encouraging. of the outstanding government of