For a long time now, I, along with many other mutual fund cheerleaders in India, have gone through a small monthly celebration. Amfi releases the previous month's SIP figures, almost always a record, and we celebrate them as proof that the ordinary Indian has learned to save patiently instead of hiding in a 'safe' bank deposit or chasing greed in the market.
This July was no exception. ₹31,961 crore flowed in through SIPs, the fifth consecutive month above ₹30,000 crore and the 65th straight month of positive equity flows. These numbers should be strong evidence of how deeply the saving habit has taken root. But a little digging raises a few concerns.
Hidden decline
The problem is that underneath the headline number, the smallest savers may have been vanishing.
Over the past financial year, accounts investing between ₹500 and ₹1,000 have fallen by nearly 1.4 million, the first drop in years. The band just below them, the ultra-small less-than- ₹500 folios, stayed flat, while every band above them grew.
The aggregate looks good because the larger accounts have grown enough to set new records and mask the decline in the smallest ones. So the SIP boom and the vanishing small saver are happening at the same time, in the same data, and the headline hides the second inside the first.
This is worth pausing on because it changes what the record means.
The funnel
Think of the SIP story as a funnel meant to take a first-time saver in at the narrow end with a few hundred rupees a month and carry her, over years, towards larger and steadier investing.
The numbers now suggest the funnel is doing fine for the people already inside it but has stopped letting new ones in. It keeps and grows the savers it already has, and turns away the ones it was built to recruit.
That is a strange kind of success to celebrate.
I know the obvious explanation, and it's partly true: some of these savers did not leave but graduated to larger amounts as their incomes and their belief in mutual funds grew.
It is a pleasant idea, and it accounts for some of the movement, but it cannot explain most of it. If 1.4 million savers had climbed one step up the ladder, the band directly above would have grown by around four percent. It actually grew by about half a percent. Even adding up new investors across every band does not close the gap.
That points to a hard truth no one in the fund business will say publicly. The small ₹500-to- ₹1,000 SIP was weak to begin with: cheap to open but thin on conviction.
It was probably started because of recent returns, and the investor has been left without any guidance because no one can afford to handhold an account that size. So these folios vanish at the first sign of volatility or stagnation.
This is the actual problem. In the early phase of such an account, the market hardly matters. The money you add is far larger than any return you might earn, and the investment is too young for compounding to show a result.
With a corpus of a few thousand rupees, stopping the SIP does far more damage than any market decline. When these savers get frightened by a little volatility and stop, they harm their future far more than older investors who already have substantial gains banked in their accounts.
Bitter irony
The same data holds a bitter irony. Over the year, the average monthly SIP flow rose by about a quarter, from ₹13,052 crore to ₹16,413 crore, even as the smallest savers walked away.
The total climbed because the people who stayed put in more, which is exactly how an average rises while the very savers it is meant to celebrate are quietly leaving.
What is the solution? Put the question to the usual suspects and the answers will be the usual ones: more disclosures, another literacy drive, tighter selling rules.
The real problem is that no one in the chain that sold the plan has any incentive to keep a small folio alive through a bad market.
Unless the persistence of small accounts is made worth someone's while, the small SIP will be used for sloganeering about inclusion and not much else.
Next month, the data will arrive again. It will almost certainly be another record, and we will celebrate it the way we always do.
We will celebrate the aggregate and ignore the uncomfortable parts hidden inside it.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm.