SIPs take a hard knock on market volatility

Once the most selling product in the mutual fund industry, systematic investment plans (SIPs) are now taking the hit as investors pull out, fearing that adverse market conditions are going to continue.

While exact figures are not available, some industry estimates show that close to 250,000 SIP accounts have been closed in the last three months. A large asset management company (AMC) confirmed that 15,000-20,000 accounts were closed in the last one month, while many accounts were not being renewed as investors, uncertain about market conditions, wanted to exit with whatever they were left with.

Vinay Shukla, senior vice-president, India Infoline, said, “Although new SIPs are coming, investors are not renewing the ones that have matured. Renewals are down 30-40 per cent. Cancellations will continue as long as there is volatility in the market.”

At present, there are 3.5 million SIPs in the industry. The figure has fallen sharply from its peak of 4.2 million last year. “When it comes to SIPs, cancellations and ticket size do not matter. People are exiting even a Rs 20,000 SIP,” a distributor said.

“With the job market still volatile and salaries cut at various levels, many investors are unwilling to fulfil previous commitments. Of every 10 SIPs, four are getting cancelled,” said another distributor.

However, despite the frenzy in cancelling SIPs, it is not true to say that they have failed as a product. While SIP returns for an equity diversified fund have fallen 21.09 per cent, a lump sum investment in the fund has fallen 29.34 per cent. This shows that the market slump has hit SIP investors less.

A fund manager said, “Many retail investors got into the systematic mode of investing when markets were high. Now, they are cancelling it, not realising that they are actually exiting at a loss. This is probably the best time to start an SIP as one can get more units in a falling market.”

By investing systematically, one can get rid of the problem of timing the market, the fund manager explained. Also, the power of compounding works in favour of SIPs as they run over a period of time. It averages the cost of buying stocks by buying more units when prices are lower, and buying less when prices shoot up.