View of SIP registrations anything but rose-tinted; closures rise in FY23

Experts cite poor near-term returns, fall in investable income

Monthly systematic investment plan (SIP) flows into India have held steady above Rs 13,000 crore in 2022-23 (FY23) in the face of markets delivering muted returns in 18 months. However, it is not a rose-tinted view when it comes to viewing new SIP registrations and the cessation of existing ones.

The ratio of SIPs stopped as a percentage of fresh SIPs registered (called SIP stoppage or closure ratio in industry parlance) stood at 56 per cent in the first 11 months of FY23, compared with 41 per cent during the same period of 2021-22 (FY22).

The rise in the SIP stoppage ratio is a result of a fall in new SIP registrations and a surge in discontinuations.

Industry executives and mutual fund (MF) distributors cite three factors for the waning interest in SIPs — decline in investable surplus with households due to a rise in interest rates and high inflation, zero hand-holding in direct plans for first-time investors amid high market volatility, and subdued near-term returns.

“Liquidity has got constrained for upper middle-class investors, especially for home loans. They are the main audience for SIPs,” says Vinod Jain, principal advisor, Jain Investment Advisors.

Most equity MF schemes have delivered poor returns in 18 months due to market weakness. The benchmark National Stock Exchange Nifty50, which scaled a peak of 18,000 in October 2021, has since mostly hovered around 16,000-18,000.

The Nifty and the S&P BSE Sensex are down 4.5 per cent and 3.4 per cent, respectively, in 18 months. The market has been weighed down by comparatively higher valuations, rise in interest rates globally, and outflow of foreign investments, apart from events like the Russia-Ukraine crisis, the Hindenburg Research exposé on Adani Group, and bank meltdowns in the US and Europe.

By comparison, the performance of equity MF schemes looked much better at the end of the earlier two financial years, bringing a record number of new investors into the fold. In FY22, the Nifty50 had rallied over 18 per cent.

The volatility in the market has also beset new investor additions in FY23. In the first 11 months of FY23, the industry added only 3.7 million investors, compared with nearly 10 million in the same duration of FY22, reveals industry data.

Experts reference reversal in market conditions and the absence of new fund offerings in the equity space as the primary reasons.

The SIP closure ratio surged in the later part of the financial year. Data from the Association of Mutual Funds in India shows that the ratio rose to record highs in three months. In February, it was at 68 per cent — the highest in 27 months. The outflow from SIP accounts was at Rs 5,700 crore last month.

According to Gaurav Rastogi, founder and chief executive officer, Kuvera, the SIP discontinuation numbers should not be taken at face value.

“There can be any number of reasons that can affect this, such as rebalancing in other funds or changes in cash flow. The more important metric in our opinion is monthly SIP flows,” he observes.

Notwithstanding a rise in the SIP stoppage ratio and decline in investor addition, the flows through SIPs have remained strong throughout FY23. This shows that existing investors have continued to pour money into MFs, irrespective of market conditions.

Investors put Rs 10,000 crore into MFs funnelled through the SIP route in each of the 12 months. Reports have shown investors putting more money into MFs during phases of market downturn.