'Regular' accounts drove bulk of SIP closures in February, shows data

Closures were higher in direct plans in January

While direct plan systematic investment plan (SIP) account closures were behind the net decline in SIP accounts in January, the reverse played out in February.

 

Regular plan SIP accounts, which are expected to be more resilient to market conditions, shrunk by 0.8 million in February, registering the first monthly decline at least in the last three year.

 

The total number of active SIP accounts in mutual fund (MF) schemes declined by a million to 101.7 million in February. Regular plan SIP accounts accounted for 80 per cent of the net closures.

 

In January, the net decline in SIP accounts came from the expected quarters — direct plan or the “do-it-yourself' segment. While the direct plan SIP accounts recorded net closure of 0.9 million, regular plan accounts had risen by 0.4 million in January, shows industry data accessed by Business Standard.

 

MF schemes come in two variants — direct plan and regular plan. They only differ by way of expense structure. Direct plan is the cheaper option and is available for subscription through online platforms. Regular plans entail higher costs due to commission component and are mostly sold by banks, wealth platforms, and individual distributors.

 

Market volatility or correction is expected to have a lower impact on regular plan accounts as investors have the guidance of their distributors.

 

According to a senior MF official, the sharp decline in regular SIP accounts could be partially attributed to cleaning of SIP books by asset management companies (AMCs).

 

"A lot of housekeeping happened in February, leading to closure of SIPs. Most AMCs are said to be tuning up their old SIP books," said a senior MF official. 

 

Other officials Business Standard spoke to were unaware of any specific reasons behind the sharp decline in regular plan accounts.

 

The correction in the equity market and the subsequent decline in MF returns have also had an impact on new account opening, while also leading to higher closures.

 

The one-year SIP returns of equity schemes, barring a few, have been in the negative territory for the past two months amid a sharp fall in share prices during the September-February period.

 

The MF industry has around 10 million unique investors who have started investing in the last one year. These investors constitute close to one-fifth of the total MF investor counts.

 

SIP account openings had seen a sharp surge in the first half of 2024, boosted by the equity market rally and record number of equity fund launches.

 

The surge in SIP account openings has also led to higher premature closures. According to an analysis of longevity data from the Association of Mutual Funds in India (Amfi), one in two SIP accounts closes within two years of opening. The industry recorded 34.8 million SIP registrations in 2023, but only 18.2 million of these accounts remained active by the end of 2024.

 

SIPs are recommended by the industry and investment experts for long-term equity MF investment, ideally more than three years.