SIP closure ratio at 18-month high, Dec applications slip to 750,000

The mutual fund (MF) industry’s systematic investment plan (SIP), a monthly investment scheme, seems to be losing favour among retail investors. The applications for fresh SIPs in December slipped to 750,000, down by a third as compared to August. 

The trend could spell trouble for the Rs 24-trillion MF industry, whose reliance on SIP flows has risen in the past four years. The industry is seeing a sharp fall in fresh SIP applications as well as requests for closures are growing. 

Until August, fresh applications for SIPs grew at a steady pace. The tally for the month was one of the highest in 14 months.  However, as markets turned volatile after the Infrastructure Leasing and Financial Services (IL&FS) crisis, applications for closures climbed to their highest levels in the past 18 months. 

“SIPs have increasingly become a meaningful contributor towards equity flows. If SIPs start losing momentum, it could have an overall impact on the equity flows for the industry. In 2012-13, we saw a 15 per cent decline. We could see something similar repeating this time. If redemptions in SIPs pick up, we could even see equity flows turning negative,” said Aadesh Mehta, analyst at Ambit Capital. The SIP closure ratio (applications for stopping SIPs as a percentage of fresh SIPs) in December was at 52 per cent, implying a request for closure for every fresh application. 

The equity flows are already showing signs of weakening due to a strain in SIPs. In January, the industry saw deceleration in equity inflows for a third straight month. 

The flows into equity schemes, which include tax-saving schemes, stood at Rs 6,158 crore — the lowest since February 2017. 

According to experts, the slowdown in volumes of fresh SIPs can be attributed to retail investors pulling out their investments due to the sell-off in mid- and small-caps. 

“In the past one year, the total number of SIPs has been falling as markets have been choppy. Retail investors, who typically prefer the SIP route, entered mid- and small-caps schemes, expecting robust returns in line with these schemes’ past performance. 

However, in the past one year, the small-cap index itself has declined 35 per cent, with several mid- and small-cap schemes seeing a sharp fall in returns,” said Rahul Parikh, CEO at Bajaj Capital.

After seeing a healthy growth rate over the past few quarters, even the monthly contribution growth through the SIP route is showing signs of weakness. In the December quarter, the average monthly contribution through SIPs grew at 4.6 per cent, the lowest growth rate since the data is available.

While flows in SIPs are showing signs of strain, experts said this was an opportune time for starting fresh SIPs.

“In this recent phase of the cycle, some new investors are worried because previously they have not seen such shifts. For smart investors, this is an opportunity to top up their SIPs,” said Ashutosh Bishnoi, managing director and chief executive officer at Mahindra MF. 

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