July 2022 SIP flows prove that investors are really persisting

9 Aug 2022 , 07:51 AM

It may be recollected that in FY22, SIP flows had touched record levels of Rs124,566 crore and going by the early estimates for the first 4 months up to July, FY23 promises to be bigger and stronger in terms of SIP flows.  Here is how.

Data Source: AMFI

As can be seen in the above chart, April 2022 saw a modest tapering of SIP flows to Rs11,863 crore but bounced back to Rs12,286 crore in the month of May 2022. It has been stable since. For June 2022, SIP flows were stable at Rs12,276 crore and at Rs12,140 crore in July 2022. Before the maze, a quick detour on why investors gravitate to SIPs!

A quick detour: Why are investors gravitating towards SIPs?

Before going into the nuances of SIP flows in July 2022, here is a quick detour to understand why Indian investors are gravitating towards SIPs or systematic investment plans.

a)      In a sense, the experience of 2020 has been a great teacher. Many investors tried to time the market and exited their SIPs around the pandemic. However, it was the investors who persisted with their SIPs, who were laughing all the way to the bank.

b)      There is an automatic fit between the income flows and SIP outflows. Nothing can be more disciplined than setting aside a small sum each month for your long term goals. Apart from the discipline, it is easy to understand and elegant to execute.

c)      It saves investors the hassles of timing the market. Most investors are wiser and realize that timing the market is a zero-sum game. A few bad days and all your efforts come to nought. The best way out is to adopt an agnostic approach to investing like SIPs.

d)      Lastly, the power of SIPs can be tested and verified with real data. If you run a SIP through 2 or 3 cycles, you invariably end up better off in a SIP. Timing the market has just given people the ulcers without any performance to show.

It is a combination of factors that has driven SIPs, but it must be said that the post pandemic period was a natural energizer to the concept of SIPs. Now, back to SIP data.

Reading through the SIP story of July 2022

FY23 may have just completed just 4 months, but we now have data for 6 years in terms of monthly and annual SIP flows. If you look at the underlying secular trend, it has been consistently growing, except for the brief lull in FY21, due to the pandemic. In the chart below, FY23 data is annualized, so not strictly comparable. However, with each passing month, the FY23 data is increasingly reflective of the full-year trend. One thing we noticed in FY22 was that the full year trend is captured quite effectively by the end of Q1.

Data Source: AMFI (FY23 data is annualized)

Since absolute numbers are misleading, the average monthly SIP ticket (AMST) can be an answer. This has been on a steady uptrend over last 6 years. AMST was Rs3,660 crore in FY17, Rs5,600 crore in FY18, Rs7,725 crore in FY19, Rs8,340 crore in FY20, Rs.8,007 crore in FY21 and Rs10,381 crore in FY22. In FY23, AMST as of July 2022 stands at Rs12,141 crore.

What are the key takeaways? Firstly, SIP flows have been robust and with NFOs reopening in July, we should wait for the double effect. Secondly, SIP flows have remained stable despite global and domestic headwinds like recession fears, China slowdown, inflation, OPM stress, and valuation concerns. Investors have learnt that in SIPs; only persistence pays.

SIP folio, SIP AUM and the spread story for July 2022

SIP flows in rupee terms can be enticing and simple, but at times misleading too. SIP flows do not capture the retail intensity of SIP flows or the retail distribution. That is captured by SIP folios and SIP AUM. Both, SIP folios and SIP AUM can be used as proxies for assessing retail spread, although SIP folios (MF accounts unique to an AMC) are more reliable.

How did the SIP folio growth story pan out in July 2022? The number of SIP folios increased from 554.89 lakhs in June 2022 to 561.94 lakhs in July 2022. That is monthly net accretion of 7.05 lakh SIP folios or 1.27%. The momentum of SIP folio accretion has been falling, but that can be attributed to uncertain market conditions and lethargy at higher levels. Even if you factor in multiple folios and non-equity folios, the folios growth still reflects a good picture of retail intensity. It may not be precise; but a fair median nevertheless!

What about SIP AUMs? The SIP AUM (assets under management) increased sharply from Rs551,189 crore in June 2022 to Rs609,296 crore in July 2022. This spike of 10.54% in SIP AUM in July 2022 can be almost entirely attributed to the sharp spike in equity indices. However, the retail SIP folio accretion in July has been better than June, so there is retail intensity that is still being built. In short, retail appetite for equity funds is robust. As of July 2022, SIP AUM accounted for one-third of overall retail Mutual Fund AUM.

SIP stoppage ratio spikes in FY23

SIP stoppage ratio is the ratio of SIP accounts discontinued in a specified period to the new SIP accounts opened. Lower this ratio, the better it is as it indicates higher retention of SIP investors. After all, you don’t want your SIP investors exiting and going away. You really want to retain them. Some of the longer term trends are interesting. For FY20, the SIP stoppage ratio for the full year was 57.84% while for FY21 it was 60.88%.

The high SIP stoppage ratios in FY20 and FY21 can be attributed primarily to the COVID induced uncertainty. Cash flow emergencies also forced investors to redeem mutual funds. However, in FY22, the SIP stoppage ratio gravitated sharply lower to 41.74%. That is within the acceptable SIP stoppage ratio range of 40% to 45%. However, the first 4 months of FY23 have shown a sharp deterioration in SIP stoppage ratio.

Between April 2022 and July 2022, the SIP stoppage ratio stands at 55.53%. In June 2022, the SIP stoppage ratio had touched a high of 63.86%; almost back to the pandemic levels. In comparison, the SIP stoppage ratio has tapered to 59.53% in July 2022. However, for the first four months overall, the SIP stoppage ratio is above comfort zone at 55.53%.

The millions dollar question is where is the next big thrust to the SIP story going to come from? The last big surge in SIP accounts came from the millennials entering the equity and mutual fund market. That trend may still be around, but the momentum could be waning. Remember, there are 26 crore life insurance holders, 60 crore bank account holders and 90 crore mobile phone owners. That would be the next step in the pyramid to tap for SIPs.