SIP Closure Ratio: How to actually interpret and act on it?

How exactly to interpret the SIP Closure ratio? Let us first look at the significance of the SIP Closure Ratio.

April 23, 2020 11:33 IST | India Infoline News Service
In the last few days, there has been a lot of coverage in the press about the sharp spike in the SIP Closure ratio in India. As the chart below captures, the SIP closure ratio has spiked to nearly 71% in March 2020. 

Data Source: AMFI
A cursory glance at the chart tells you that the SIP closure ratio was at its highest level in March. What is more, the number of new SIP accounts opened was also at a yearly low. How exactly to interpret the SIP Closure ratio? Let us first look at the significance of the SIP Closure Ratio.

What the SIP Closure ratio is all about?

The SIP Closure ratio measures the ratio of SIPs closed or terminated in any month to the new SIP accounts opened. This is normally expressed as a percentage. For example, a SIP Closure ratio of 70% means that for every 10 SIP accounts that were opened during the month, 7 SIP accounts were closed. Ideally, the lower the ratio, the better it is. A higher SIP ratio means that the net addition to SIP accounts is getting slower. But, why are SIPs so important?

In the last 4 years, SIP flows have consistently increased on a monthly basis. From an average monthly SIP flow of around Rs3,500cr in 2016, the figure has grown to an average of Rs8,500cr per month. SIPs are normally linked to long term goals, and hence, they are considered to be more stable and sticky flows. SIPs represent retail flows into equity funds and are a barometer of investor conviction in equities as an asset class. That is why the ratio assumes significance.

How financial advisors / AMCs must interpret the SIP Closure Ratio?

For Mutual Fund AMCs and financial advisors, the sharp spike in SIP Closure Ratio has some clear action points.  Here are 2 such action points that are called for.
  • Financial advisors must focus on whether the spike in SIP Closure ratio is one-off or a structural shift. Even in the past, the ratio has gone above 60% occasionally but has tended to again gravitate towards 50%. If the high ratio persists for a period of 3 months or more, then it could be a challenge. Financial advisors must engage more closely with clients to understand their concerns.
  • AMCs must offer a more holistic solution to clients. Typically, when you have a combination of a 30% fall in the index and a lockdown, there is going to be a panic shift towards liquidity. That is when AMCs and advisors must get together to offer solutions. Can loans against MF holdings be arranged by the AMC in tie-up with banks to ease liquidity? Can AMCs offer SIP holiday (simple procedure) for 3 months just like an EMI holiday?

How individual investors must interpret the SIP Closure Ratio?

For individuals, the most important takeaway is not to panic and close the SIP. If you have any doubts, just check this table which captures the annualized returns on SIPs of Top-8 equity funds over a 20 year period.

Fund Name 20-Year SIP Returns 15-Year SIP Returns
SBI Magnum Global (G) 18.83% 12.72%
Nippon India Growth (G) 19.73% 9.65%
Franklin Prima (G) 18.15% 11.43%
ICICI Pru FMCG (G) 18.13% 14.29%
Aditya Birla MNC (G) 17.54% 14.61%
DSP Equity Fund (G) 16.93% 10.97%
ICICI Pru LT Equity (G) 16.68% 10.10%
HDFC Equity Fund (G) 16.49% 9.54%
Top-8 Performance Average 17.81% 11.66%
Data Source: Value Research

The average 20-year return is 17.81% and that means a fixed SIP in these funds of Rs10,000 per month would be worth Rs.2.28cr at the end of 20 years generating a wealth ratio of 8.5 times. This is the period when the markets have been through the global technology meltdown, Lehman crisis, mid cap meltdown, European crisis and the Coronavirus. Investors cannot really expect anything more and the onus is on them to stick on to their SIPs for the long haul. Here are two key decision points for investors.
  • Rushing to terminate your SIPs is not the answer, especially if these SIPs are linked to your long term goals. At the end of the day, your retirement and your child’s education are realities you have to contend with. The first approach should be to see if you can adjust your budget to ensure that the SIP continuity is maintained. Remember, savings have to be a target not a residual item.
  • The other option investors must look at is temporary cessation of SIP for a few months till the financial situation improves. A 3-month moratorium on a 20-year SIP will hardly make a significant dent and you don’t compromise on long term goals.
The spike in the SIP Closure ratio is a reminder that investors tend to react in panic to sharp movements in the market. It is time for some out-of-the-box thinking!

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