The Brief: A Slip Between The Cup And The SIP

The Mutual funds sahi hai campaign promoted by the Association of Mutual Funds of India — across television, print, outdoor and digital — has hit a crescendo with the industry body signing up cricketers right from Sachin Tendulkar, M.S. Dhoni, Rohit Sharma and others. The campaign has kept the momentum going in SIPs — at ₹1.99 lakh crore, gross SIP flows hit an all-time high in FY24, over 27% higher from FY23.

However, in 2024, May was a month to remember. The ratio of SIPs discontinued vs those registered hit a high of 88.4%, a peak that seemed to signal a seismic shift in investor behaviour. This turned out to be a one-off event, though, as the number of SIPs discontinued fell in June. Despite this, the landscape remains fraught with tension: The six-month average SIP cancellation rate stubbornly clings to a high of 57%. Even excluding May’s anomaly, the rate is still 50%.

While the number of active SIP accounts hit an all-time high of 8.99 crore in June, there seems to be an underlying tale of wavering confidence. In 2023, the 12-month average SIP cancellation rate around 57%, up from 53% in 2022, 41.9% in 2021, and a Covid-induced high of 66% in 2020. With an estimated 85% of SIP flows directed towards equity, this suggests that of the 8.99 crore active SIPs, around 7.64 crore are equity-related.

The pandemic was a crucible that tested investor resolve. In March 2020, as global stock indices plummeted on what became known as Black Monday, SIP cancellation rate spiked to 70.9% from 50.4% in February. The Dow Jones experienced its most severe drop since the 2008 recession, and the Sensex nosedived, triggering circuit breakers and recording its biggest one-day fall. Although markets eventually recovered, the shock left retail investors jittery, with the cancellation rate soaring to 80.7% in May 2020 and remaining elevated through the year.

As the pandemic eased and markets rose, the cancellation rate fell to 47.8% for 2021 and 2022. However, it spiked again to 57% in 2023 and has stayed high in 2024. The reasons are manifold: Job losses, salary cuts, and the speculative nature of timing the market. The 88% cancellation rate in May 2024 likely reflects a mix of maturing three-year SIPs and investor wariness amid volatile macroeconomic and geopolitical conditions.

Amid these fluctuations, the Indian mutual fund industry’s net asset under management (AUM) has surged, crossing the historic ₹50 lakh crore mark in December 2023 and ₹60 lakh crore by June 2024. This represents a nearly 38% rise from ₹44.39 lakh crore in June 2023, with a month-on-month rise of 3.82% from ₹58.91 lakh crore in May 2024.

Equity MFs have been a significant driver of this growth, led by sectoral and thematic funds which accounted for over 55% of monthly inflows. June saw 17 new open-ended NFOs hit the market, raising ₹0.15 lakh crore, with nine sectoral/thematic funds contributing ₹0.13 lakh crore. Equity fund inflows skyrocketed by 370% to ₹40,608 crore in June, compared with ₹8,637 crore in June 2023. Yet, the industry also witnessed a net outflow of ₹43,637 crore for the first time this fiscal.

Despite these dynamics, the trailing 12-month PE multiples for benchmark indices don’t appear out of whack at 24.72 times, though several large-cap and mid-cap stocks trading at exorbitant valuations even as the Sensex, after hitting a closing low of 29,468 in March 2020, surged over 2.7x in four years to 80,604 levels. While studies show equity investing is best suited for the long term, with a 10-year investment horizon being a better alternative, evidence also suggests that the majority of investors struggle to overcome their skittish behaviour.