Even though net mutual fund inflows have been volatile over the past few months, the figure for monthly systematic investment plans (SIP) has been reassuringly steady. Experts used this stability to conclude that the Indian retail mutual fund investor has matured, is not easily swayed by market gyrations and stays put for the long term. However, a few data points over the past six months have raised some concern. There has been a slight slowdown in fresh SIP registrations and a small uptick in SIP stoppages. Some financial advisers have publicly flagged the risks when it comes to SIP stoppages. We tell you what’s happening and what this means for you—the retail investor.

Slowdown in SIPs

The monthly net SIP inflow in mutual funds in quarter ended September 2019 was 8,253 crore, marginally higher than the 8,238 crore figure in quarter ended April 2019, according to data from industry body Association of Mutual Funds in India (Amfi).

This marginal change over six months was in stark contrast with the 1,037 crore jump (an increase of 15.5%) in SIP net inflows over the corresponding period in FY19.

The slowdown in SIP inflows coincides with a slowdown in the Indian economy and the episodes of bad bonds in debt schemes of mutual funds that eroded the confidence of investors. Economic growth slid from 8.2% in the first quarter (Q1) of FY19 to just 5% in Q1 FY20 which in turn dragged down both income growth (from where SIPs originate) and returns on equity markets (which influence investor optimism about equity investment).

inconclusive data
inconclusive data

Besides, there are two more worrying trends. SIP stoppages have grown by around 4% over the past six months and fresh SIP registrations are down by 5.7%, a senior industry official told Mint, who did not want to be named. Similar data has been recently cited by other publications as well.

SIP stoppages grew from 540,000 in April to 563,000 in September, an increase of 4.2%. But the movement has been uneven. SIP stoppages were at 586,000 in May, 540,000 in June, 563,000 in July, 583,000 in August and 563,000 in September. Clearly, the monthly figure has moved up and down with no definitive direction.

What explains this

Does this mean that the patient SIP investor is finally giving up? “SIP stoppage is rapidly gaining momentum. While everyone is entitled to choice, the lack of discipline and understanding of what creates success in equity investing is now seen in more people than ever," tweeted Shyam Sekhar, founder, iThought, an investment advisory firm, last week.

Vishal Dhawan, founder, Plan Ahead Wealth Advisors raised the possibility of a drag on SIPs from slower salary hikes and slower income growth while rejecting any substantial effect on SIPs.

Some experts allay this fear. “We are not seeing anything alarming in terms of SIP stoppages or registrations of fresh SIPs," said Arun Kumar, head of research at FundsIndia.

In fact, Paytm Money saw the highest-ever SIP registrations in September, claimed managing director and CEO Pravin Jadhav. Payments wallets have expanded the reach of mutual funds to young people in smaller towns and villages where traditional advisers may not find it viable to set shop and this could probably explain the contrasting trend they are witnessing as compared to the overall industry.

Though Kumar said the quantum of SIP stoppages was not worrisome, he acknowledged the stagnation in monthly SIP net inflows. “Most SIP investors entered in 2016-18 and are yet to see great returns. So, though they are not stopping SIPs, there is no great enthusiasm to increase SIPs either," he said. But not stopping SIPs is a sign of maturity, he added.

The fact the number of SIP accounts rose from 26.6 million to 28.4 million (a 7% increase), according to data provided by Amfi, also dilutes the impact of data regarding SIP stoppages. However, monthly SIP contributions have remained almost flat at 8,253 crore (a 0.2% increase) over the past six months, according to Amfi data.

In addition, switching to a different mutual fund scheme, typically, results in stoppage of a previous SIP and opening of a fresh one in the new scheme, which can drive up both numbers in absolute terms. One way to look at this is to examine the ratio of SIP stoppages to fresh SIPs. The ratio climbed from 60% to 66% over the April-September period—stoppages have increased compared to fresh SIPs but the increase is not substantial. “It is also unclear whether systematic transfer plans (STPs) are included in the SIP figure released by Amfi. Typically, bonuses and one-off payments are invested in mutual funds through STPs," said Prakash Praharaj, a Mumbai-based financial adviser. He also dismissed the notion that the SIP slowdown may be because of layoffs or lower increments.

Mint Take

The monthly net SIP inflows have remained flat and this does represent a slowdown. However, when it comes to the SIP stoppage data, it does not lend itself to a definitive conclusion.

Data aside, stopping SIPs is a poor strategy for an equity investor because markets give asymmetric returns over different time periods. For instance, on 20 September, the Nifty rose 5.32% to post its largest single-day gain in 10 years after several weeks of negativity. Before the rally, the average five-year return for large-cap funds had dipped to 7.8%; after the rally, it climbed to a more respectable 9.26%.

Also, SIP amounts should be increased in line with salary hikes because inflation erodes the value of SIPs over time. Moreover, expectations change as income goes up leading to higher goal values. This can be met only with higher investments, and stopping and stagnating SIPs don’t augur well for meeting goals. Anyone losing patience should note that an equity SIP should ideally be continued for seven to 10 years, shows a recent study by Mint (read here). So don’t stop your SIPs unless you have reached your goal or your situation has changed.Even though net mutual fund inflows have been volatile over the past few months, the figure for monthly systematic investment plans (SIP) has been reassuringly steady. Experts used this stability to conclude that the Indian retail mutual fund investor has matured, is not easily swayed by market gyrations and stays put for the long term. However, a few data points over the past six months have raised some concern. There has been a slight slowdown in fresh SIP registrations and a small uptick in SIP stoppages. Some financial advisers have publicly flagged the risks when it comes to SIP stoppages. We tell you what’s happening and what this means for you—the retail investor.

Slowdown in SIPs

The monthly net SIP inflow in mutual funds in quarter ended September 2019 was 8,253 crore, marginally higher than the 8,238 crore figure in quarter ended April 2019, according to data from industry body Association of Mutual Funds in India (Amfi).

This marginal change over six months was in stark contrast with the 1,037 crore jump (an increase of 15.5%) in SIP net inflows over the corresponding period in FY19.

The slowdown in SIP inflows coincides with a slowdown in the Indian economy and the episodes of bad bonds in debt schemes of mutual funds that eroded the confidence of investors. Economic growth slid from 8.2% in the first quarter (Q1) of FY19 to just 5% in Q1 FY20 which in turn dragged down both income growth (from where SIPs originate) and returns on equity markets (which influence investor optimism about equity investment).

Besides, there are two more worrying trends. SIP stoppages have grown by around 4% over the past six months and fresh SIP registrations are down by 5.7%, a senior industry official told Mint, who did not want to be named. Similar data has been recently cited by other publications as well.

SIP stoppages grew from 540,000 in April to 563,000 in September, an increase of 4.2%. But the movement has been uneven. SIP stoppages were at 586,000 in May, 540,000 in June, 563,000 in July, 583,000 in August and 563,000 in September. Clearly, the monthly figure has moved up and down with no definitive direction.

What explains this

Does this mean that the patient SIP investor is finally giving up? “SIP stoppage is rapidly gaining momentum. While everyone is entitled to choice, the lack of discipline and understanding of what creates success in equity investing is now seen in more people than ever," tweeted Shyam Sekhar, founder, iThought, an investment advisory firm, last week.

Vishal Dhawan, founder, Plan Ahead Wealth Advisors raised the possibility of a drag on SIPs from slower salary hikes and slower income growth while rejecting any substantial effect on SIPs.

Some experts allay this fear. “We are not seeing anything alarming in terms of SIP stoppages or registrations of fresh SIPs," said Arun Kumar, head of research at FundsIndia.

In fact, Paytm Money saw the highest-ever SIP registrations in September, claimed managing director and CEO Pravin Jadhav. Payments wallets have expanded the reach of mutual funds to young people in smaller towns and villages where traditional advisers may not find it viable to set shop and this could probably explain the contrasting trend they are witnessing as compared to the overall industry.

Though Kumar said the quantum of SIP stoppages was not worrisome, he acknowledged the stagnation in monthly SIP net inflows. “Most SIP investors entered in 2016-18 and are yet to see great returns. So, though they are not stopping SIPs, there is no great enthusiasm to increase SIPs either," he said. But not stopping SIPs is a sign of maturity, he added.

The fact the number of SIP accounts rose from 26.6 million to 28.4 million (a 7% increase), according to data provided by Amfi, also dilutes the impact of data regarding SIP stoppages. However, monthly SIP contributions have remained almost flat at 8,253 crore (a 0.2% increase) over the past six months, according to Amfi data.

In addition, switching to a different mutual fund scheme, typically, results in stoppage of a previous SIP and opening of a fresh one in the new scheme, which can drive up both numbers in absolute terms. One way to look at this is to examine the ratio of SIP stoppages to fresh SIPs. The ratio climbed from 60% to 66% over the April-September period—stoppages have increased compared to fresh SIPs but the increase is not substantial. “It is also unclear whether systematic transfer plans (STPs) are included in the SIP figure released by Amfi. Typically, bonuses and one-off payments are invested in mutual funds through STPs," said Prakash Praharaj, a Mumbai-based financial adviser. He also dismissed the notion that the SIP slowdown may be because of layoffs or lower increments.

Mint Take

The monthly net SIP inflows have remained flat and this does represent a slowdown. However, when it comes to the SIP stoppage data, it does not lend itself to a definitive conclusion.

Data aside, stopping SIPs is a poor strategy for an equity investor because markets give asymmetric returns over different time periods. For instance, on 20 September, the Nifty rose 5.32% to post its largest single-day gain in 10 years after several weeks of negativity. Before the rally, the average five-year return for large-cap funds had dipped to 7.8%; after the rally, it climbed to a more respectable 9.26%.

Also, SIP amounts should be increased in line with salary hikes because inflation erodes the value of SIPs over time. Moreover, expectations change as income goes up leading to higher goal values. This can be met only with higher investments, and stopping and stagnating SIPs don’t augur well for meeting goals. Anyone losing patience should note that an equity SIP should ideally be continued for seven to 10 years, shows a recent study by Mint (read here). So don’t stop your SIPs unless you have reached your goal or your situation has changed.

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