Even as market experts sound caution over expensive stock valuations, the number of investors signing up for systematic investment plans (SIPs) of mutual funds far outnumber those discontinuing their SIPs. The SIP stoppage ratio, indicating closed accounts under mutual fund SIPs relative to new openings, slipped to a 27-month low in February.
In February, 49.80 million new SIP accounts were registered, compared with 51.84 million a month ago, down 4 percent. Discontinuations fell 10.3 percent during the period to 21.33 million from 23.8 million, data from the Association of Mutual Funds in India (AMFI) show. As a result, the ratio of SIPs stopped as a percentage of fresh SIPs registered (SIP stoppage or closure ratio) came in at 42.83 percent in February -- slowest pace of rise since December 2021, from 46 percent in January.
The lower the SIP closure ratio, the better it is, as it indicates higher retention rate of SIP investors.
Analysts said majority of the new investors are motivated by the high returns mutual funds have delivered in the last couple of years. Hence, smallcap and midcap funds are getting consistent inflows despite concerns over liquidity in these stocks and valuations. Rising SIP registrations is one of manifestations of increased investors' interest.
Investors have also seen steep declines in prices of select stocks due to factors such as earnings shocks and regulatory actions, which makes them prefer diversified portfolios. And an SIP in mutual funds helps them do that. Many first-time investors perceive MF as a relatively less risky avenue to invest in stocks instead of picking shares on their own, analysts added.
In February, open-ended equity funds saw a 23 percent increase in inflows to Rs 26,865.78 crore, marking the 36th consecutive month of positive equity fund flows since March 2021. Systematic investment plans (SIPs) hit a record high of Rs 19,186 crore, with 8.20 crore SIP accounts. The industry's net AUM reached Rs 54,54,214.13 crore in February.
Cautious on mid, small, and microcaps
Analysts also said that since the start of this month, sentiment has turned cautious for mid, small, and microcap stocks due to recent regulatory actions. Despite this caution, the prevailing belief is that the market will remain bullish until elections. The rationale is that the government will try to maintain a positive market atmosphere leading up to the elections.
Deepak Jasani,Head of Retail Research, HDFC Securities, said after a sharp rise in indices in November/December 2023, investors chose to take profits and also stop their SIPs, expecting a correction in the markets to set in.
However as the markets consolidated, and did not correct, in January and February 2024, investors changed their approach. Also, the tendency to stop one SIP and start another saw a fall in February, as reflected from a fall in new SIPs along with a fall in discontinuation.
The market has been rising amid volatility in 2024, in part due to actions by SEBI, RBI and the Enforcement Directorate.
AMFI has urged members to curb inflows into small and mid-cap funds to protect investors from a potential crash. This request follows communication from India's market regulator, SEBI, which also mandates additional information disclosure about the risks associated with these funds.
Manish Mehta, National Head - Sales, Marketing & Digital Business, Kotak Mahindra AMC said investor experience through SIPs continue to be positive. Increased awareness and systemic efficiency to intimate investors in advance on upcoming SIP tenure maturity, renewals are measures the distributors and AMCs take to maintain continuity.
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