Real story of mutual fund SIPs is in the net to gross ratio

8 Sep 2023 , 10:39 AM

The one number that investors and mutual funds look forward to each month in the AMFI data reporting is the SIP flows. It needs no reiteration that SIP flows in India have picked up steam in the last few years, with the growth being very prominent in the post COVID period. If you look at the table below, there are two columns of interest. The first shows the SIP flows annually which actually get reported. The second column shows the average monthly ticket, which is the total flows apportioned on a monthly basis.

Financial  Year	Gross Annual SIP  flows (Rs crore)	Average Monthly SIP Ticket (AMST)
FY16-17	Rs43,921 crore	Rs3,660 crore
FY17-18	Rs67,190 crore	Rs5,600 crore
FY18-19	Rs92,693 crore	Rs7,725 crore
FY19-20	Rs100,084 crore	Rs8,340 crore
FY20-21	Rs96,080 crore	Rs8,007 crore
FY21-22	Rs124,566 crore	Rs10,381 crore
FY22-23	Rs155,972 crore	Rs12,998 crore
FY23-24 #	Rs175,368 crore	Rs14,614 crore

Data Source: AMFI (FY24 is 4-months data)

As can be seen from the above table, the annualized SIP flows have been consistently growing since FY21, although the SIP data for the latest year i.e., FY24 is 4-months data annualized. However, our experience in the past few years has been that after 3 months, the data tends to become annually reflective. However, there is a catch in this data. The AMFI reports SIP flows on a gross basis and not on a net basis. Here is why this is important.

Gross flows versus net flows into SIPs

Before we get into the actual data points on gross versus net SIP flows, let us look at what is this distinction and why this distinction is so critical. Gross flows are the overall flows that go into SIPs (systematic investment plans) of mutual funds across equity debt and other categories. However, SIPs tend to be largely focused on the equity side, being a retail product. However, the real story of SIPs is not what comes in but what stays invested in the market. For example, if Rs1 crore of SIPs come in during a year and then Rs40 lakhs of SIPs either get terminated or redeemed or not renewed; then the net SIP flows would only be Rs60 lakhs and not Rs1 crore. But why would net SIPs be so low?

Without getting into the reason of why net flows are lower than gross flows, let us look at some common reasons why all SIP flows don’t translate into SIP stock. Firstly, all SIPs have a tenure and unless you opt for a perpetual SIP, the SIP would automatically expire at the end of the tenure. That would reduce the net SIP flows. The other reason is financial shortages and this problem was most acute during the two years of COVID pandemic. Scores of SIP accounts were either prematurely redeemed or terminated to preserve cash flows. The issue then, was more about survival than about long term planning. Thirdly, investors often tend to panic when the markets crash and may rush to terminate the SIPs. Of course, this defeats the basic purpose of SIPs, which is rupee cost averaging. However, decisions on investing can often be irrational; and that is true of investors across the world.

How then was the net SIP ratio in FY22 and FY23

We have seen the gross SIP flows on a monthly basis, since it is reported in detail by SEBI along with the folios and SIP AUM. However, it is net SIP that actually results in accretion in flows and sustainable flows. Check out the table below that presents gross SIP flows and net SIP flows for FY22 and FY23 with the net to gross ratio.

Month	Gross SIP	Net SIP	Net / Gross Ratio	Month	Gross SIP	Net SIP	Net / Gross Ratio
Apr-21	8,596	3,030	35.25%	Apr-22	11,863	6,706	56.53%
May-21	8,819	4,020	45.58%	May-22	12,286	8,155	66.38%
Jun-21	9,155	2,309	25.22%	Jun-22	12,275	8,600	70.06%
Jul-21	9,609	2,932	30.51%	Jul-22	12,140	7,812	64.35%
Aug-21	9,923	2,024	20.40%	Aug-22	12,693	6,130	48.29%
Sep-21	10,351	1,730	16.71%	Sep-22	12,976	6,399	49.31%
Oct-21	10,519	2,820	26.81%	Oct-22	13,041	7,499	57.50%
Nov-21	11,005	5,087	46.22%	Nov-22	13,306	3,257	24.48%
Dec-21	11,305	5,394	47.71%	Dec-22	13,573	5,869	43.24%
Jan-22	11,517	5,277	45.82%	Jan-23	13,856	7,649	55.20%
Feb-22	11,438	5,868	51.30%	Feb-23	13,686	8,004	58.48%
Mar-22	12,328	7,128	57.82%	Mar-23	14,276	7,795	54.60%
FY22 Total	1,24,565	47,619	38.23%	FY23 Total	1,55,971	83,875	53.78%

Data Source: Cafemutual.com

The table above captures the net SIP flows for each month in the last 2 financial years, apart from the gross SIP figures, which are reported monthly by AMFI. Here are some key takeaways from the data sheet.

• Between FY22 and FY23 (financial year ending March), the gross SIP flows have risen by 25.21% to Rs1,55,971 crore. That is an impressive growth on a yoy basis. However, what is more impressive is that the net SIP flows have grown from Rs47,619 crore in FY22 to Rs83,875 crore in FY23, representing a yoy growth of 76.14%. This is an impressive growth because the growth in net SIPs not only comes from higher gross flows but, more critically by higher SIP retention.

   

• If you look at FY22, the net to gross SIP flow ratio has been rather low at just 38.23%. That means for every Rs100 that comes into SIPs of mutual funds, nearly Rs62 goes out in the form of SIP terminations, SIP redemptions or plain non-renewal of SIPs. That net to gross ratio has improved sharply to 53.78% in FY23 and that can be attributed to greater confidence that people showed in SIPs losing just about Rs46 for every Rs100 that came in the form of SIPs. Ideally, a SIP retention ratio of around 60% would be ideal and is also considered to be an acceptable and sustainable benchmark for net SIP flows.

How to interpret this sharp fall in the net to gross SIP ratio?

That brings to an interesting analytical takeaway; how to interpret this lower net to gross ratio. There are broadly 2 interpretations of this phenomenon and while neither may fully explain the phenomenon, both are partially correct in their interpretation. Firstly, the logical inference is that FY22 was a relatively more volatile year. There was the second round of COVID infections followed by the sharp fall in equity markets since peaking in October 2021. In addition. This was also the year when FPI welling was very high and that also contributed to investors getting slightly edgy about their SIP holdings. This led to a sharp increase in the number of SIPs terminated or redeemed, resulting in a low net to gross ratio.

The other interpretation is more encouraging. Many investors, who had redeemed their SIPs amidst the doomsday predictions of COVID in 2020 and 2021, ended up their ruing their decisions. After all, it was the investors who gritted their teeth and held on to their SIPs during this period that laughed all the way to the bank. That had forced a sentimental shift among investors in the post 2021 period, which automatically resulted in improvement in the net to gross ratio in FY23. To an extent, both interpretations are absolutely on the mark and do explain this sharp increase in the net to gross ratio.