As mutual fund investors pulled out over Rs12,900cr from equity funds in the month of November 2020, the flow of SIPs continued to be robust. For the month of November 2020, the SIP inflows at Rs7,302cr was sharply lower than the previous months. However, the fact that the SIP flows continued to remain robust indicates that the real concerns are to do with the lump-sum outflows from equity funds and not exactly the SIP flows. However, a closer look at the chart does raise some concerns.
Is sub-8000 crore SIP flows the new normal?
For 18 months in succession, from December 2018 till May 2020, the monthly SIP flows remained above the Rs8,000cr. Jun-20 was the first month after 18 months when the SIP flows fell below Rs8,000cr. From that point, the SIP flows have been consistently trending lower. In fact the trend line shows how the trend has shifted to a sharp downtrend post June 2020.
What exactly has driven this sharp fall in SIP flows. There could be a number of reasons. Firstly, people are increasingly sceptical about continuing a SIP when markets are at such high levels as it would mean that you are buying fresh units at elevated prices. Secondly, COVID did create stress in the finances of middle income households. While liquidity was still relatively comfortable in most cases, investors have opted to go slow on fresh commitments and have also opted to discontinue their SIPs, as we shall see in greater detail later. Lastly, SIPs also got impacted by the fact that most of the large cap funds continued to underperform the indices due to the Kurtosis effect. That also led to some disillusionment with SIP as an investment vehicle.
But then, the SIP AUM has been growing consistently, right?
If you look at the SIP AUM between March 2020 and December 2020, there has certainly been a growth in SIP AUM. For example, over the last 9 months, the SIP AUM has grown from Rs239,886cr to Rs378,286cr. That is a growth of 57.7% in AUM over the last 9 months, which is actually quite appreciable. Then what is the problem?
To put this data in the right perspective, let us look at the growth in number of SIP folios between March-20 and Dec-20. The number of folios increased from 311.97 lakhs to 340.66 lakhs;a growth of just 9.2% in number of SIP folios. That is where the real problem lies. There is a serious mismatch between the growth in SIP folios and the growth in SIP AUM.
That is not too difficult to interpret. Between March 2020 and December 2020, the Nifty is up 77% on an absolute basis. That growth in the Nifty has resulted in proportionate growth in the SIP AUM. Since SIPs are a retail product and done mostly in equity funds and ELSS funds, the AUM growth of SIPs is normally proportionate to the Nifty / Sensex movement.
Now , what do you see from the above chart? The SIP AUM has growth by 57.7% between Mar-20 and Dec-20. However, this is supported by just 9.2% growth in SIP folios or SIP accounts. The rest of the growth in the SIP AUM has come predominantly from appreciation in stock prices. The SIP AUM could lull us into complacency but the real challenge is the SIP folios that are really struggling to grow.
Here is a quick look at the SIP Stoppage ratio
What exactly is the SIP stoppage ratio? It is the ratio of SIPs that have been discontinued in a particular period to the total SIPs that have been added during the period. The difference is the net SIP additions and that is what contributes to the SIP Folio additions. Normally, lower the SIP discontinuation ratio, the better it is. That is because; it shows a higher degree of stickiness and conviction in investors on SIP as a product.
The above chart captures the month-wise SIP discontinuation ratio. At the two corners (red shade), the chart captures the discontinuation ratio for the previous financial year 2019-20 as well as the consolidated discontinuation ratio for the first 8 months of FY21. The comparison of the ratio of the last year and the current year is quite revealing.
The average discontinuation ratio in the current financial year has gone up sharply to 70.4% as compared to just 57.8% in the previous financial year. That means; more than 7 folios are being discontinued for every 10 folios that are getting added. That explains why the growth in folios has had a limited contribution in the overall growth in SIP AUM. If SIPs have to continue to play a crucial role, the focus has to shift to more new folios as well as better retention of SIP clients. That has to be the SIP formula for the future!