The SIP flows have been under Rs8,000cr per month since Jun-20 and that fell to a multi-year low of Rs7,302cr in Nov-20. From that level, the SIP inflows have bounced back to Rs8,418cr in Dec-20. As we said earlier, a few swallows do not make a summer so we will have to wait for more data to see if this trend sustains. But there are 2 interesting trends in the SIP flows. In fact, these trends give us the conviction that the SIP bounce in Dec-20 may not be a flash in the pan but indicative of a turnaround in SIP flows.
Trend 1 – Appreciable growth in SIP accounts
Normally, SIPs are used by retail investors to make the best of the rupee cost averaging benefit in equity funds. Equity funds and ELSS funds see the bulk of SIP interest in the MF segment. Hence it is not just the total flow but the number of folios or accounts that really matter. Normally, when the SIP client base becomes more broad-based, then the number of SIP accounts expands. That was visible in Dec-20.
As per latest SIP data for Dec-20 published by AMFI, 14.20 lakh SIP accounts were registered in the month of Dec-20 alone. To put things in perspective, this is a growth of 33.6% over Nov-20 which saw 10.63 lakh new SIP accounts registered. The table below gives a quick picture of new SIPs registered each month since April 2020 and cumulative SIP build up.
|Month||New SIPs Registered||Cumulative SIPs|
The number of new SIPs registered in Dec-20 is not only a big jump but also substantially higher than any of the previous months. One argument is that the spate of NFOs in December resulted in a surge in new SIP accounts. Nevertheless, this does indicate that retail investors have shown preference towards SIPs.
Trend 2 – SIP closure ratio has come down sharply
This is perhaps the acid test of whether the SIP trend is sustainable. What exactly is the SIP closure ratio? It is the ratio of SIPs discontinued during the month to new SIPs registered. More than the absolute SIP closure ratio, it is the trend in SIP closure ratio that is revealing.
For the month of December 2020, a total of 7.76 lakh SIPs were discontinued while 14.22 lakh new SIPs were opened. That gives a SIP closure ratio of 54.6%, which is very close to the median SIP closure ratio that the mutual fund industry enjoyed in the previous financial year. In a sense, the SIP closure ratio is back to pre-COVID levels. The graph below gives a more telling picture of how the SIP closure ratio for each month since the beginning of this fiscal year actually panned out.
Clearly, the month of December shows a quantum downward shift in SIP closure ratio. In the current fiscal, the SIP closure ratio has averaged over 70% and in comparison the SIP closure ratio has fallen sharply to 54.6% in Dec-20. This sharp fall in the SIP closure ratio in Dec-20 is explained by the sharp rise in new SIP accounts even as SIP closures were static in absolute terms. The net impact is that the cumulative SIP closure ratio for FY21 has come down to 67.9% from 70.4% as of Nov-20.
How much can we rely on the SIP trend?
There have been various interpretations of the surge in SIPs in Dec-20. Industry insiders have attributed the sharp rise in SIPs to a string of non-working holidays in the last week of Nov-20. Their perspective is that a lot of the festival driven investing that would have been bunched in the month of November got carried forward to December. While that surely must be a reason, that may not explain a 34% jump in SIP registration in December. Obviously, there is more positivity and optimism among retail investors than meets the eye.
A quick evaluation of top equity funds would show you that investors who had sustained equity fund SIPs through 2020 would have made 5-8% more than lump-sum investors. That is something that has perhaps appealed to retail investors. After all, at a time when debt returns are dwindling, such returns on equity SIPs are an absolute bonus. That should be evident in the months to come!