Sensex above 30K is like a house of cards! SIP support can crumble suddenly

NEW DELHI: Mutual fund investment through systematic investment plans ( SIP) has emerged as a proxy of retail optimism in the equity market.

Some Rs 4,000 crore flowed in to mutual fund schemes through the SIP route every month in recent time. But industry watchers say despite soaring popularity of SIPs, any meaningful correction in the market at this stage can seriously test the consistency of such flows.

The recent surge in the domestic equity indices to their lifetime high levels was widely attributed to domestic inflows.

DII inflow was majorly responsible for lifting up the major indices to record high levels. One estimate showed DIIs poured in over Rs 1 lakh crore in equities between March 2015 and March 2017, when FIIs invested a little over Rs 40,000 crore.

Available data shows the mutual fund industry witnessed an average SIP size of Rs 3,200 per account in FY17. From January to April, inflows through SIPs were in excess of Rs 4,000 crore each month.


(MF inflows collected through SIPs in FY17; Source: AMFI)

But industry experts have doubts over the sustainability of such flows.

“It is a good start, driven by two or three variables. First, interest rates have come down, which have forced investors to think of alternatives. Secondly, the B15 incentives have prompted mutual fund companies to reach out to larger investors, which is a good thing,” Dhirendra Kumar, CEO, Value Research, told ETNow.

Kumar, however, warned that these are early days because ever since this craze for SIPs developed, investors have only witnessed a steady rise in the market.

“Investor thinking is very malleable. You see a 10 per cent decline, the mood changes and people start stopping their SIPs,” he said.

The domestic market has sparked off valuation worries in recent times, as analysts find stock prices untenable at current levels without the requisite support from earnings, which remain weak.

Should the benchmark indices witness a major correction because of any reason, local or global, it can trigger a chain reaction, leading to a long-term downturn in the market.

Domestic mutual funds had about 1.35 crore active SIP accounts as of March 31, 2017. The industry added about 6.26 lakh SIP accounts on a monthly basis all through FY17, Amfi data shows.

“If that is the case, we should have seen 75.12 lakh (6.26 times 12 months) new SIP accounts during the year. The growth in SIP accounts has been 38 per cent at 1.35 crore over approximately 98 lakh last year, which is not that phenomenal. It simply means people have also probably been exiting SIPs. Also, if we look at flow trend, the growth in inflows to equity funds stood at 39 per cent in FY17 (retail investors predominantly invest in equity funds), but outflows jumped 65 per cent. It validates the assumption that retail investors had been taking money out at the same time,” said Vidya Bala, ?head of mutual fund research at Fundsindia.com.

Even as a new crop of investors comes into the market, the need for long-term investing – averaging will only help in the long term – is not something people have understood, Bala said, adding that these flows are susceptible in market corrections.

Kumar said earlier people used to do SIPs for a defined period, but now it has become feasible to give SIPs a mandate or a bank debit mandate for perpetuating.

“It used to be one of the decision-making points and people used to think of it like a recurring deposit. But because of the automation process, perpetual investments will be quite helpful. But we still have to see how do investors behave once we see a decline in the market,” he said.