Mumbai: India’s Rs 6.81 trillion mutual fund industry is losing its most trusted source of equity inflows—systematic investment plans (SIPs).

SIP is the most affordable way of investing in a mutual fund, with instalments as low as Rs 50. Fund managers encourage investors to invest through this route as investments are well spread out and there is no attempt to time the market.

The concept sells on the fact that by investing through SIPs, investors will not only be able to buy more units (compared with lump-sum investments) in a given tenure, but also be saved from the risk of losing money at one go in the event of a market fall. Being less risky and more affordable, SIPs have managed to account for a major part of retail sales for the domestic fund industry.

Introduced in the 1990s by Franklin Templeton Asset Management (India) Pvt. Ltd, till recently, SIPs were a guaranteed source of inflows for the industry, grappling with dwindling sales and vanishing folios since August 2009, when the market regulator scrapped the so-called entry load for mutual funds.

But a prolonged bear market, a bleak economic outlook and the inability of fund managers to offer adequate returns to equity investors have beaten down investor sentiment. Indian stocks lost at least 24% in 2011 and volumes of trade were the thinnest globally.

“During NFO (new fund offer) days two-and-a-half years back, SIPs were being touted as a magic way to make profits. But now investors have lost patience in SIPs. When someone invests for two years and sees no return, he leaves. The sustained decline in the market has resulted in such discontinuation of SIPs in equity schemes,” said Dhirendra Kumar, CEO, Value Research India Pvt. Ltd, a Delhi-based mutual fund tracker. “But the investors will regret their discontinuation in SIPs when the market turns good.”

There are 44 fund houses in the country. The industry’s average assets during the December quarter came down to Rs 6.81 trillion from Rs 7.13 trillion in the September quarter.

A study by CAMS, which compiles data for 17 fund houses that contribute at least 59% of the industry’s assets, reveals that SIP account cancellations per month have almost doubled from 59,867 in January 2011 to 115,204 in December 2011. The cancellation numbers have been rising month on month since January 2011.

A similar study by Karvy Computershare that enlists data for the rest of the industry shows that during the March-December period, the fund houses have lost at least Rs 113.33 crore of such assured inflows per SIP cycle in equity schemes.

The Karvy data for the 10-month period shows cancellations of 726,200 SIP accounts. Cancellations are most prevalent among investors who pay more than Rs 5,000 a month for SIPs.

“During March-December 2011, there has not been a single month in which equity schemes have had net additions in terms of value,” said the Karvy Computershare study.

To worsen things, the Rs 5,001–10,000 slab has been witnessing negative net additions during the period and has been negative in five out of ten months, it pointed out.

“The Rs 2,501–5,000 slab also witnessed negative net additions during the past two months… It is primarily equity schemes which clearly have seen negative net additions in almost all the investment slabs except for those below Rs 1,000. This is another reason why the average ticket size of SIP investments is constantly moving downwards,” said the Karvy report.

None of these reports is in public domain. Mint has reviewed both.

“Equity schemes have lost 8% of the inflows in the 10-month period of March-December 2011. The inflow values have continued to drop for seven consecutive months between May and November 2011, only to see a marginal improvement during December 2011,” it said.

The investor confidence seems to be shifting marginally to debt schemes. A 3 February study by rater Icra Ltd pointed out that with volatility of returns across equity funds over the last few quarters, the debt category has emerged as a preferred investment option aided by higher returns amid a rising interest rate scenario.

“MF (mutual fund) industry’s debt AUM (assets under management) registered a 10% year-on-year increase for the year ended 31 December 2011... The overall industry AUM witnessed a moderate decline during the period, marked by a steep decline in equity AUM,” said the Icra report.

The AUM of Icra-rated debt schemes witnessed a 14% increase year-on-year as on 30 November 2011 and accounted for nearly 37% of the industry debt AUM.

The mutual fund industry’s debt AUM registered a 10% year-on-year increase to Rs 4.5 trillion for the calendar year 2011, but following the rise in investors’ risk aversion and volatility of returns in the equity markets, the industry equity AUM witnessed a steep 27% year-on-year decline to Rs 1.61 trillion, the Icra report pointed out.

The capital market regulator has been holding discussions with market intermediaries and former chairmen to find ways to restore the investor confidence in equity markets.

Kayezad E. Adajania contributed to this report.

anirudh.l@livemint.com