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Wednesday, August 12, 2020

Explained: If SIP numbers are rising, why are collections falling?

SIP Mutual Funds: It is different for every investor, as much depends upon how the Covid-19 related stress has impacted their cash flows.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: July 16, 2020 11:33:43 am
SIP, SIP registrations, SIP investments, sip covid 19 investment benefits The average monthly new SIP registrations for the 12-months in 2019-20 stood at 9.82 lakh. Reuters

The mutual fund Systematic Investment Plan (SIP) inflow for June 2020 has thrown up several trends that captures investor behaviour following pandemic stress and lockdown. If on one hand the industry has seen a move towards normalcy in terms of new SIP registrations in June, on the other it has also seen a rise in redemptions and SIP closures. Another interesting trend is that even as the new SIP registrations are moving towards pre-covid numbers, the average ticket size of SIP contribution is witnessing a month-on-month decline since the pandemic. Here is a look at what is happening and why.

How do the SIP numbers stack up?

In June the number of new SIP registrations jumped by 9.13 lakh. They dropped to 7.5 lakh in April and 8.08 lakh in May 2020 after Covid-19 pandemic led to a sharp fall in markets in March. The average monthly new SIP registrations for the 12-months in 2019-20 stood at 9.82 lakh.

While the new registrations rose, the industry also witnessed a rise in number of SIP closure in June at 6.58 lakh. In April and May the SIP closure numbers stood at 5.4 lakh and 6.52 lakh respectively.

On a net level, the industry added 2.55 lakh SIPs in June. In April and May the net additions stood at 2.1 lakh and 1.56 lakh SIPs respectively. The net monthly average SIP addition for 2019-20 stood at 4.14 lakh.

How is it that both new registrations and redemptions are on a rise?

Different investors are behaving differently, depending upon how the Covid related stress has impacted their cash flows. For a set of investors who have not witnessed a dent in their salaries but have seen a decline in their discretionary spend on account of the lockdown, there has been a rise in savings. Industry insiders say that with markets getting stabilised, a lot of those additional savings are getting channelised into mutual funds and direct stock trading and hence a rise in SIP registrations.

For another set of investors — salaried and self-employed — who have seen a dip in their income levels, investors are looking to maintain liquidity with themselves. While some among them are simply cancelling their SIPs as they don’t have the surplus to invest in these times, others who are more stressed are simply going for redemptions to keep cash with them.

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If SIP numbers are rising, why are SIP collections falling?

While the outstanding SIP numbers have grown from 3.12 crore in March to 3.23 crore in June, the SIP contribution has come down from Rs 8,641 crore to 7,917 crore in the same period. This means that the average SIP contribution has been falling. If the average SIP contribution stood at Rs 2,769 in March 2020, it has steadily come down to Rs 2,447 in June. Industry insiders say that this could be because of various factors.

1. The first factor is switch of large HNI investors from MF SIP investment to direct equity investment. Insiders say that after the markets fell in February and March, many large investors stopped their SIPs and moved to direct equities to take advantage of the market condition. Since the ticket size of such SIPs is large, their stoppage resulted into a decline in overall average ticket size for the industry.

2. The second factor is that the new SIPs from new investors is of lower ticket size, leading to a decline in average ticket size for the industry.

3. Further, in many case, as income levels dropped, existing investors simply went for a reduction in the quantum of their SIP investment instead of stopping the investment. So in effect, if someone had an SIP of Rs 10,000 per month, he/she may have reduced it to Rs 5,000 or to Rs 3,000 following a drop in income. While this helped them reduce the outflow, it also ensures that the investor continues to take some benefit of the lower net asset values on account of decline in stock prices.

Rising SIPs but falling contribution and ticket size

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