Continue your SIPs even in a downturn

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Investors seemed less enthusiastic to buy into systematic investment plans (SIPs) in the year gone by compared to previous years. The rate of growth in systematic investment plan (SIP) flows in April-December 2019 reduced substantially compared to the same period in the previous year. In April-December 2019, the total funds mobilized via SIPs were 74,394 crore, 8% higher than 68,500 crore in the same period in 2018, according to the Association of Mutual Funds in India (Amfi) data. The rate of growth was much higher in the same period in the previous years. SIP flows recorded a 46% rate of growth in 2018 over the 2017 figure, and a 50% rate of growth in 2017 over the 2016 SIP flows figure.

Even the monthly data partly shows the same trend. In December 2019, the number of SIP stoppages went up to 591,000 from 555,000 in the previous month. New SIP registrations also went down from 1.08 million in November 2019 to 962,000 in December 2019. Though SIP inflow in December 2019 was the highest ever— 8,518 crore—it included SIP transactions scheduled for 30 November 2019 (which was a Saturday and a non-business day) that were processed on 2 December 2019. A note in Amfi’s monthly report said this could have partially contributed to the December SIP inflow figure.

So what explains this dwindling interest in SIPs and what does it mean for existing and new investors? Read on to know more.

Dwindling interest

Experts believe that poor market performance over the past couple of years has made people reluctant to committing more money in equity instruments.

“The market has been quite volatile over the last one year; while there has been growth in indices such as S&P BSE Sensex and NSE Nifty, it has been on the account of a rally in a few large-cap stocks,” said G. Pradeepkumar, chief executive officer, Union Mutual Fund. Investors are reluctant to add more money, he added.

Returns from a majority of mutual funds in the mid- and small-cap spaces is in the negative territory, which has disappointed many new investors who started SIPs in these funds in recent years.

According to data from Value Research’s website, 13 out of the total 36 funds in the mid- and small-cap categories delivered negative SIP returns over a three-year period. Five funds delivered returns of less than 1%, while the average three-year SIP return in the mid- and small-cap categories was a meagre 1.33%.

“A major portion of the SIP book is in mid- and small-cap funds and investors have become jittery as SIP returns for most of the investors have turned negative over three-to-four years,” said George Heber Joseph, CEO and chief investment officer, ITI Asset Management Ltd. Many investors are stopping SIPs in mid- and small-cap funds and moving to large-caps, he added.

Radhika Gupta, CEO, Edelweiss Asset Management Ltd, said this shows typical investor behaviour where money is invested based on recent performance. “Equity flows to a certain extent will be market-linked. A lot of new investors came in through SIPs after 2017 looking at one- or two-year returns, which looked very good. However, now you will also see some increase in SIP termination as one-year returns, especially in mid- and small-cap categories haven’t been good,” she added.

But she believes investors have shown more maturity compared to previous years as the net outcome is far better than what happened during previous market corrections. “Equity flows have been positive every month due to SIP flows, irrespective of the market’s performance,” Gupta said.

What should you do?

“My advice to investors would be to not stop their SIPs and if they feel distressed by market movements, not to check their SIP returns very frequently. You do SIPs for long term—five to 10 years—and SIP returns over this period is very good,” said Gupta.

Remember that the rupee-cost averaging benefit from SIPs kicks in over various market cycles. When you invest through SIPs, you accumulate more units at a lower price when equity markets go down, which reduces your average cost of investment. This benefit plays out when the market goes up. So, continue your SIPs during downturns and increase the amount every time your income goes up. Equity investments are meant for the long term; so short-term market gyrations shouldn’t bother you.

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