Business News/ Money / Personal Finance/  SIP stoppage ratio hits new peak in May

Monthly systematic investment plan (SIP) flows in India have held steady above the 8,000 crore mark despite the equity markets nose-diving post the covid-19 crisis. The net inflow figure dipped marginally from 8,376 crore in April to 8,123 crore in May, although the drop compared to March level is a more significant 6%.

However, another measure of SIPs shows more alarming signs. The ratio of SIPs stopped as a percentage of fresh SIPs registered (SIP stoppage or closure ratio) hit 81%, a 15-month high. Most of this spike was due to existing SIPs being discontinued. The SIP stoppage ratio was 71% in March and 72% in April 2020.

According to data from the Association of Mutual Funds in India (Amfi), the number of discontinued SIPs rose from 540,000 to 652,000, a 20% jump over a month. On the other hand, fresh SIP registrations also rose from 750,000 to 808,000, a more modest 7.7% rise.

“I would expect that most of the stoppages would be in value and small-cap funds. Many of these have failed to perform on even a five-year basis which is a sort of threshold for retail investors," said Anant Ladha, founder, Invest Aaj for Kal, a mutual fund distributor based in Kota, Rajasthan.

The five-year compounded annual growth rate (CAGR) of small-cap and value funds were 3.55% and 3.65%, respectively, compared to 5.04% in large-cap funds. Post 2017, large-cap funds led by a narrow set of stocks have pulled ahead of the rest with the gap in returns widening to about 8% CAGR.

Gaurav Awasthi, senior partner, IIFL Wealth Management, put down the SIP stoppages to the effect of the lockdown on incomes. “The most likely cause of SIP stoppage is income uncertainty due to job loss or potential job loss. Some people may have also panicked due to the market volatility," said Awasthi.

However, he warned against stopping SIPs for those who are not facing income uncertainty. “Stopping your SIP now by looking at past returns will be stopping it at the very bottom when your investment may end up making the most impact. Investors should avoid this unless they really need cash for day-to-day expenses," he said.

SIPs accumulate more units in falling markets and actually outperform lump sum investments in such conditions. Investors should continue their SIPs unless there is a problem with their jobs or incomes.

Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Updated: 12 Jun 2020, 11:33 AM IST
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