Mutual fund SIPs are growing, but why do people withdraw so soon?

AMFI data also suggests that of the total mutual fund assets held by individual investors in equity-oriented schemes, on average, 48 percent is redeemed within two years.

Monthly collections under mutual fund systematic investment plans (SIPs) have doubled in the last three years to Rs 15,814 crore as of August 2023. This is celebrated, because typically, it’s individual investors who use SIPs for regular investment (mostly in equity funds), and such assets are considered to be long term in nature.

Also read: In August 2023, equity inflows surged by 165 percent.

At the same time, when one looks at the industry-wide distributor commission data published by the Association of Mutual Funds of India (AMFI) for FY 22-23, four of the top 10 distributors have net outflows in their overall assets under management (AUM). These are distributors which cater to individual, rather than institutional, investors.

AMFI data also suggests that of the total mutual fund assets held by individual investors in equity-oriented schemes, on average, 48 percent is redeemed within two years.

Investors' tenure in equity mutual funds

With conflicting data it’s hard to conclude which trend is stronger; are individual investors leaning more towards long-term investing as suggested by the SIP data, or is the reality still stuck in 2–3-year churn cycles for such assets?

Confidence in SIP investing

The current SIP book for the mutual fund industry, at Rs 8.47 trillion (Rs 8.47 lakh crore), is roughly 18 percent of the industry  AUM, per AMFI. This has slowly inched higher; in March 2022, the proportion was just over 15 percent. Along with better awareness about the product, returns may also play a role in expanding the number of individual investors taking up SIPs.

According to Vijai Mantri, a capital markets veteran, “Equity markets have been delivering good returns for a few years now, and investors move to assets where returns are visible in the near past. Real estate, on the other hand, has disappointed, with fewer individual investors investing in real estate. This frees up cash, which very likely comes into equity, and SIPs in equity mutual funds are one option.”

The benchmark index Nifty 50 has delivered annualised returns of 12.5 percent in the last five years; which is a compelling, inflation-beating proposition, combined with the flexibility and transparency that comes along with mutual fund investing. It’s no wonder that with better awareness, individual investors are making the switch.

But are investors staying?

On the ground though, financial advisors who spoke to Moneycontrol say that awareness around SIPs is not in question; rather, the focus on goal-based investing needs to be nurtured.

“There is a lot of information out there and everyone is aware about mutual funds and SIPs. However, there is still a need to create optimum awareness about one’s risk tolerance and the time horizon for investment, keeping in mind life goals and financial objectives,” says Vivek Rege, founder and Chief Executive Officer, VR Wealth Advisors Pvt Ltd.

It’s not just your equity SIP that matters, but your overall SIP solutions for balancing  your investments. Nevertheless, it’s clear that SIP investing is on an upswing.

How does one invest, and for how long?

While data shows that the SIP book is increasing, what proportion comes from direct versus distributor-linked regular plans is not known.

Secondly, we know that roughly half the equity-oriented assets in the industry get redeemed within two years. What is unclear is whether these assets are reinvested in equity mutual funds, or whether they stay in equity assets through direct stock purchases. In the larger picture, the way one chooses to invest in an asset is secondary if they remain invested in the same asset. An individual investor has the choice of buying stocks directly, through mutual funds, through small case portfolios, and through Portfolio Management Services (PMS) and Alternate Investment Funds (AIF).

According to Gaurav Rastogi, founder and CEO, Kuvera.in, “The same investor rotates from one fund to another, hence, investor holding periods can be longer. In our database at an investor level, the holding period is upwards of five years (for equity funds).”

Anecdotally, investors can either remain in mutual funds after redeeming a particular scheme, or the money that gets redeemed (maybe because of near-term underperformance), may find its way to individual stocks as well; thus, remaining in equity. Or it may not come back to equity assets at all due to fear of capital loss.

Mantri points out, “When an investor sees consistent underperformance in a scheme, sometimes despite understanding the dynamics of equity investing, it’s difficult to convince them to remain invested for long. An advisor or distributor may be able to guide those assets back into another more suitable equity fund.”

Also, say a folio has two schemes. If you withdraw your money from one scheme after two years, and switch to another, your exit from the first scheme would show a holding period of two years. This, despite you remaining in equity funds.

Further, the distributor commission data may not give the whole picture as digital platforms that facilitate direct investing have enhanced the ability of individual investors to start SIPs by themselves, without a distributor.

Thus, as of now, there is no concrete data that can show the average holding period for individual investors in equity mutual funds on the whole.

Long lasting assets

Knowing the SIP inflow number for the month is only one part of the story. What we need to understand is how many SIP investors remain SIP investors in equity funds for more than the published 24-month mark, be it in the same or different fund. That can help understand whether the general behaviour of investors is leaning towards the long term, or are investors just following the trend.

Moreover, the recent push in SIPs has come at a time when equity markets themselves have been largely supportive.

Mantri says, “The real test of long-term assets will happen only when we see a period of negative returns. Between 2008 and 2013, after the global financial crisis, there were daily net redemptions seen for equity schemes across mutual fund houses.”

Also read: Confused about which mutual fund to invest in? Check out MC30; Moneycontrol's curated basket of investment-worthy funds

Similarly, the litmus test for the direct SIP book will also be a market correction that lasts a few months or more. Will such ‘do-it-yourself’ investors be able to stomach the anxiety and continue investing through a market winter? Will nudges on direct platforms suffice in keeping investors from redeeming or pausing SIPs in a bleak and downward-trending market?

“We don’t struggle with early redemptions from equity funds as the long-term orientation of our clients comes from linkages with goals and objectives. There are no cases where SIPs are stopped for reasons other than goal completion or maybe an emergency,” says Rege.

At the moment, whatever data we have suggests a small but sure shift towards systematic investing, which may very well be more long term in nature. Ultimately, how long you remain invested will be driven by your behaviour. Regardless of the trend, you must decide whether SIPs in equity funds are beneficial for your long-term wealth creation strategy, or whether it makes sense to switch every 2-3 years.