By now, the story of active Systematic Investment Plans (SIPs) in mutual funds rising to a record 6.12 crore in 2022, leading to flows of ₹13,573 crore is well-known. But the latest data from the industry body AMFI reveals an uncomfortable statistics – mutual fund investors in large numbers are discontinuing their monthly SIPs or allowing them to run out.
In December 2022, the number of SIPs that were either stopped or saw their tenure run out at 15.39 lakh, hit a new high and saw a 40 per cent spike over the preceding 6-month average (10.9 lakh). The number of new SIPs created in December was still at 23.24 lakh, but this is only a 15 per cent growth compared to the 6-month average (20.20 lakh). Industry experts cite the already high SIP base, low one-year returns and the effect of savings coming off post-Covid, as reasons for higher SIP closures. The jury is still out on whether this is a one-off or sustainable trend.
Asked about SIP closures, the AMFI Chief Executive NS Venkatesh explains that the incremental numbers were not big, given the high base. “The number of SIPs discontinued or tenure completed in December 2022 is approximately 2.5 per cent of total SIP folios in the industry. Between January and December 2022, 1.21 crore net new SIP folios were added and monthly SIP contribution has gone from ₹11,517 crore in January 2022 to ₹13,573 crore in December 2022”.
While SIPs are closed for many reasons, recent returns play a big role in investors deciding to continue with their SIPs. Equity funds are a big draw for SIP investors but last one-year returns from the category have been staid. During Covid, as interest rates on FDs and debt options fell to rock-bottom and stock markets took off, many investors switched to equity SIPs. From about 3.5 crore in 2020, the number of SIPs rose to nearly 5 crore in 2021 and 6.1 crore by 2022. But relatively new subscribers are likely to have seen a slowdown in returns.
Asked about SIP closures, Swarup Mohanty, CEO, Mirae Asset Investment Managers (India), pointed out that past one-year returns play a big role in retail investing decisions, though they shouldn’t. “This happens in every new cycle. (When stock markets perform), a whole drove of new investors enters and if their return expectations are not met, some of them drop out. The last one-year return experience has not been comparable to the post-Covid rally. So some of the new investors have perhaps been disillusioned”.
Large-cap equity funds, after clocking nearly 16 per cent and 26 per cent returns in 2020 and 2021, returned just 4 per cent in 2022. Flexi-cap funds have seen average returns fall to 2 per cent in 2022 from 34 per cent in 2021 and 18 per cent in 2020. Midcap funds have clocked 2022 returns of 4 per cent, from 46 per cent in 2021 and 25 per cent in 2020.
For many urban high-income families, Covid with its limited spending avenues proved to be a phase of extra savings. This played a role in equity SIPs rising too, from a ₹8,500-crore odd monthly SIP contribution to ₹13,500 crore. But savings have been reverting to normal after the Covid unlock, with Indians back to shopping and travelling. Given all the talk of a K-shaped recovery, some market watchers say that SIP closures could be a function of incomes not recovering to pre-Covid levels. An industry executive points out that some folks have deployed their Covid savings in property, triggering a housing revival. EMIs have reduced scope for SIPs.
Despite these issues, industry participants seem to believe that the outlook for SIPs remains good. “SIPs in general will see growth with more financialisation of savings and acceptance of equities for long-term wealth creation,” says Akhil Chaturvedi, Chief Business Officer, Motilal Oswal AMC.