Systematic investment plans or SIPs, which have cushioned the mutual fund (MF) industry amid volatility in equity flows, have begun to show signs of weakness. According to industry estimates, the SIP closure ratio, which is the number of discontinued SIPs as a percentage of new SIPs registered, rose to 66 per cent in August and September.
This meant that for every three SIP accounts opened, two SIP accounts were discontinued over the last two months.
According to industry officials, it is largely the weaker hands that have led to the spike in closure ratio. "Those who had entered markets with a shorter investment horizon, have been disappointed with the returns they have seen so far. At the same time, pushing SIPs to new investors has not been easy, with recent trailing returns not showing a strong track record," said the senior executive of a fund house, requesting anonymity.
In September, the number of new SIPs stood at 850,000, while that of discontinued SIPs was 563,000. While the closure of SIPs has remained steady at around 550,000 in the current fiscal, it is the decline in number of new SIP registrations that has triggered the spike in the SIP closure ratio.
At 850,000, the number of new SIP registrations is 16 per cent lower than July's tally of 1,019,000. Both in August and September, the number of new registrations has hovered close to 850,000.
"There is slowdown in lumpsum equity flows (the tactical investments made in MF products as against systematic investments). This underscores that there is still money waiting on the sidelines," said Kaustubh Belapurkar, director of mutual fund research at Morningstar India.
In September, the MF industry garnered equity flows of Rs 6,609 crore, which was 27 per cent lower than previous month. The monthly contribution through SIPs has so far remained intact at around Rs 8,000 crore, even as growth has largely remained marginal on a monthly basis.
Over a one-year period, the mid- and small-cap schemes have yielded tepid returns of 4.9 per cent and 0.2 per cent, respectively.
"Investors who were looking to make quick gains in the mid- and small-cap space, are actively looking for exit opportunities," said another fund manager.
Industry observers say that the overall equity flows coming into the MF industry could come under pressure, if SIPs see any significant slowdown.
Anecdotal evidence suggests that large part of SIP flows are directed towards equity schemes. This implies that SIP flows already account for 51 per cent of industry's gross equity inflows (Rs 16,053 crore in September).
In September, contribution through SIPs stood at Rs 8,262 crore, improving marginally from previous month's tally of Rs 8,231 crore.