Investors turn cautious on investing in MFs; closure of SIPs on the rise

One out of every three applications is for termination of plan as sentiment takes a hit

Investors are turning cautious on investing in mutual funds (MFs), as rising volatility in the market dampens sentiment. Besides a slowdown in equity inflows, closure of systematic investment plans (SIPs) is also on the rise. 

According to industry data, for every three SIP applications this fiscal year, at least one was for stopping the plan. In contrast, for the large part of the previous fiscal year, the ratio of fresh applications to closure requests was around five-to-one. 

The trend could be worrying given these monthly investment plans are widely seen as a strong structural driver for future growth of the Rs 25-trillion MF industry. Unlike lump sum money, SIP flows tend to be stickier and so their growth helps in offsetting cyclical risks. 

The increase in closure of SIP accounts can be closely correlated with the increase in volatility and meltdown in small- and mid-cap stocks.

“Lot of money chasing high returns had recently moved into mid- and small-cap schemes. The mis-match between investor expectations and returns led to some pre-mature closures. During 2008, closures were much higher as negative returns had extended over a much longer time-frame,” said Swarup Mohanty, chief executive officer of Mirae AMC.

Advisors say investors who recently entered markets are finding it difficult to deal with the sharp spike in volatility.

“Investors in mid- and small-cap schemes were seeing robust returns but have become concerned recently as returns are fading away fast. First-time investors are also pulling out as they didn’t expect to see negative returns,” said Srikanth Matrubhai, a Bengaluru-based MF distributor and advisor.  

According to data from Value Research, SIP returns on small-cap schemes are down more than 12 per cent over the last one-year period, while those for mid-cap funds are down four per cent. 

Advisors, however, believe SIP investors would be better off staying put. “When market goes through such corrections, SIPs also bring down the average cost of investments. As and when conditions improve, mid- and small-cap schemes could see a sharper recovery,” said Vidya Bala, head of MF research, FundsIndia. 

Fund managers are also seeing investment opportunities amid the correction. “The entire small-cap space has corrected. While the small-cap index is down 12-13 per cent, a few stocks have corrected much more. Amid this fall, we see pockets of opportunities. While these may not be extremely cheap, they are still reasonable. The earnings cycle also seems to be picking up for these companies,” said Vinit Sambre, head (equities) at DSP Investment Managers.

Small-cap schemes, which had imposed limits on investor inflows amid surging valuations, have started easing some of these restrictions. For instance, DSP MF opened the DSP Small Cap Fund for subscription through SIPs and systematic transfer plans (STPs) in the first week of September. 

In August, SIP contribution to the industry stood at Rs 76 billion; growing at 48 per cent CAGR over the last 2 years. 

Analysts at Nomura estimate that flows through SIPs contributed to 10 per cent of equity assets. “We think increasing share of MFs in financial savings is a structural story and has become a mainstream investment mode, with SIPs on the rise... while there may be cyclicality risk in the lump sum equity investment ... we think the product (SIPs) continues to be most cost competitive, amid improving distribution,” said Nomura analysts in a note.