Mutual funds: Are SIPs the best way to invest in mutual funds for long term? Experts weigh in
As per the latest data shared by the Association of Mutual Funds of India (AMFI), the monthly SIP was at Rs 20,371 crore as against Rs 19,271 crore in March and Rs 19,187 crore in February 2024.
- May 18, 2024,
- Updated May 18, 2024 10:05 AM IST
Inflows into systematic investment plans (SIPs) of mutual funds have been increasing every month. As per the latest data shared by the Association of Mutual Funds of India (AMFI), the monthly SIP was at Rs 20,371 crore. SIP commitments accumulated to a substantial Rs 2.05 lakh crore over a 12-month rolling period, with the monthly SIP contributions reaching an impressive Rs 20,371 crore in April as against Rs 19,271 crore in March and Rs 19,187 crore in February 2024.
Consequently, the Assets Under Management (AUM) for SIP-linked funds rose to Rs 11.26 lakh crore, representing approximately one-fifth of the total assets managed by mutual funds.
But is SIP the best way to accumulate funds in the long term? While some experts feel it is a great way to start investing and help in annulling the negative effects of market volatility through consistent periodic investments over the long term, some feel it may not help you reach your target corpse.
Anurag Singh, Hedge Fund Manager, in an article 'Why SIPs are unlikely to make you rich?', said: "Systematic Investment Plans (SIPs) came into existence to beat the market volatility and timing disasters. SIPs looked like great investing tool in hindsight as there were none in the past. They may not look great in future as there are too many of them now. And the data is deteriorating fast. My recent visit to India was an eye opener. I met many promising young men and women who are regularly saving and contributing to SIPs. They’re not rich today but are certainly hustling it out... Most financial goals are versions of this theme – I need to have Rs 5 crore by next 10,15 or 20 years. For others, the sum is even higher to the tune of Rs 10 crore or Rs 20 crore. SIPs are planned accordingly. Since the corpus depends on higher returns, the tendency is to drift towards mid- and small-cap funds based on historic performance."
He added: "SIP trend in the recent past has been revolutionary. The number of demat accounts today are at 140 million. In a nation of nearly 500 million working population, the penetration is now nearly 30%. If this gets to 50%, we’ll get to the peak levels achieved in developed markets."
But why SIPs may not be great plan for future
Singh said: "New SIP accounts are closely linked on the movement of the Nifty 50 and have a very strong correlation or R square of 75%. For every 10% move in the Nifty, SIP flow will actually likely increase by 9.2%. But what is more interesting is that if the market goes flat or simply doesn’t move up for say more than a year, the SIP flows will begin to dip immediately."
"AMFI reports indicate that the number of folios (SIP and others) in equity and hybrid schemes in March 2021 was 75 million but spiked to almost 136 million by March 2024. So, the customer accounts doubled in three years but all at peak valuations after 2021. What’s worse, while large-cap folios have increased by just 30% since FY21, we see mid- and sectoral-fund folio count increasing by 210% and 230%, respectively. Small-cap SIP accounts increased by a whopping 380% after FY21 and are now 50% more than large-cap account," he said.
He further said that the SIP flows number is the highest ever at Rs 20,371 crore ($2 billion) per month for April 2024. While that inspires confidence in markets, the shocker is the huge shift towards mid- and small-cap funds. Since mid-2022, large-cap funds have begun to see outflows that accelerated in 2023. The AUMs of large-cap funds are Rs 3.1 lakh crore, which is equal to mid-cap AUM. Small-cap funds at Rs 2.5 lakh crore AUM are not far behind.
He further added: "While systematic investing may prevent steep drops in invested capital for clients, it may well be the case that they are closing large-cap folios and opening mid- or small-cap accounts. The data certainly indicates that. No wonder, many mutual funds have decided to stop accepting lumpsum investments in small cap. Because the money for small-cap funds is not fresh capital. It probably was coming from redemption of large-cap funds from the same fund house."
Where is this trend heading
Singh said: "Most of the SIP flows have been spent in buying same stocks at high valuations where the foreign investors have made a smart exit. FII holding has dropped from 22% pre-pandemic to almost 16% now. When large-cap funds stay stagnant for a couple of years, the patience of SIP investors will be tested. And most are likely to relent."
SIPs are still trusted
"SIPs are the best instruments to ride the market volatility and this can be done very easily today via investing in mutual funds. Let us understand the reasons for the same," said Hrishikesh Palve, Director, Anand Rathi Wealth Limited.
He added SIPs help in practising Financial Discipline. SIPs can get you into the habit of saving frequently. Banks allow you to set up an automatic investment instruction at a frequency of your choice. Besides, it allows you to start with a small amount. The cost per unit is averaged out over the overall investment horizon. More number of units are purchased during a market low, compensating for purchases made during a market high.
"Investors can keep emotions at bay as SIPs automatically purchase in both high and lows and the investor need not closely track the market movements," Palve said.
Here's the breakup:
|
| 5 yr | 10 yr | 25 yrs |
| Invested in Peaks | 10.84% | 10.54% | 11.53% |
| Invested regularly via SIPs | 14.02% | 12.40% | 12.86% |
| Invested in Lows | 18.54% | 14.41% | 13.87% |
"As an investor deposits a small sum in any mutual fund scheme over the year, they generate a substantial corpus over time thanks to the accumulation of investments and the compounding effect. For example, a monthly SIP of Rs 20,000 invested over 20 years and assuming a modest 10 percent rate of return results in final corpus of Rs 1.52 crore. This is an investment amount of just Rs 48 lakh! That said, investors should also be aware of the risks associated with investing in mutual funds, especially equity-oriented ones," said Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Mutual Fund (India).
Inflows into systematic investment plans (SIPs) of mutual funds have been increasing every month. As per the latest data shared by the Association of Mutual Funds of India (AMFI), the monthly SIP was at Rs 20,371 crore. SIP commitments accumulated to a substantial Rs 2.05 lakh crore over a 12-month rolling period, with the monthly SIP contributions reaching an impressive Rs 20,371 crore in April as against Rs 19,271 crore in March and Rs 19,187 crore in February 2024.
Consequently, the Assets Under Management (AUM) for SIP-linked funds rose to Rs 11.26 lakh crore, representing approximately one-fifth of the total assets managed by mutual funds.
But is SIP the best way to accumulate funds in the long term? While some experts feel it is a great way to start investing and help in annulling the negative effects of market volatility through consistent periodic investments over the long term, some feel it may not help you reach your target corpse.
Anurag Singh, Hedge Fund Manager, in an article 'Why SIPs are unlikely to make you rich?', said: "Systematic Investment Plans (SIPs) came into existence to beat the market volatility and timing disasters. SIPs looked like great investing tool in hindsight as there were none in the past. They may not look great in future as there are too many of them now. And the data is deteriorating fast. My recent visit to India was an eye opener. I met many promising young men and women who are regularly saving and contributing to SIPs. They’re not rich today but are certainly hustling it out... Most financial goals are versions of this theme – I need to have Rs 5 crore by next 10,15 or 20 years. For others, the sum is even higher to the tune of Rs 10 crore or Rs 20 crore. SIPs are planned accordingly. Since the corpus depends on higher returns, the tendency is to drift towards mid- and small-cap funds based on historic performance."
He added: "SIP trend in the recent past has been revolutionary. The number of demat accounts today are at 140 million. In a nation of nearly 500 million working population, the penetration is now nearly 30%. If this gets to 50%, we’ll get to the peak levels achieved in developed markets."
But why SIPs may not be great plan for future
Singh said: "New SIP accounts are closely linked on the movement of the Nifty 50 and have a very strong correlation or R square of 75%. For every 10% move in the Nifty, SIP flow will actually likely increase by 9.2%. But what is more interesting is that if the market goes flat or simply doesn’t move up for say more than a year, the SIP flows will begin to dip immediately."
"AMFI reports indicate that the number of folios (SIP and others) in equity and hybrid schemes in March 2021 was 75 million but spiked to almost 136 million by March 2024. So, the customer accounts doubled in three years but all at peak valuations after 2021. What’s worse, while large-cap folios have increased by just 30% since FY21, we see mid- and sectoral-fund folio count increasing by 210% and 230%, respectively. Small-cap SIP accounts increased by a whopping 380% after FY21 and are now 50% more than large-cap account," he said.
He further said that the SIP flows number is the highest ever at Rs 20,371 crore ($2 billion) per month for April 2024. While that inspires confidence in markets, the shocker is the huge shift towards mid- and small-cap funds. Since mid-2022, large-cap funds have begun to see outflows that accelerated in 2023. The AUMs of large-cap funds are Rs 3.1 lakh crore, which is equal to mid-cap AUM. Small-cap funds at Rs 2.5 lakh crore AUM are not far behind.
He further added: "While systematic investing may prevent steep drops in invested capital for clients, it may well be the case that they are closing large-cap folios and opening mid- or small-cap accounts. The data certainly indicates that. No wonder, many mutual funds have decided to stop accepting lumpsum investments in small cap. Because the money for small-cap funds is not fresh capital. It probably was coming from redemption of large-cap funds from the same fund house."
Where is this trend heading
Singh said: "Most of the SIP flows have been spent in buying same stocks at high valuations where the foreign investors have made a smart exit. FII holding has dropped from 22% pre-pandemic to almost 16% now. When large-cap funds stay stagnant for a couple of years, the patience of SIP investors will be tested. And most are likely to relent."
SIPs are still trusted
"SIPs are the best instruments to ride the market volatility and this can be done very easily today via investing in mutual funds. Let us understand the reasons for the same," said Hrishikesh Palve, Director, Anand Rathi Wealth Limited.
He added SIPs help in practising Financial Discipline. SIPs can get you into the habit of saving frequently. Banks allow you to set up an automatic investment instruction at a frequency of your choice. Besides, it allows you to start with a small amount. The cost per unit is averaged out over the overall investment horizon. More number of units are purchased during a market low, compensating for purchases made during a market high.
"Investors can keep emotions at bay as SIPs automatically purchase in both high and lows and the investor need not closely track the market movements," Palve said.
Here's the breakup:
|
| 5 yr | 10 yr | 25 yrs |
| Invested in Peaks | 10.84% | 10.54% | 11.53% |
| Invested regularly via SIPs | 14.02% | 12.40% | 12.86% |
| Invested in Lows | 18.54% | 14.41% | 13.87% |
"As an investor deposits a small sum in any mutual fund scheme over the year, they generate a substantial corpus over time thanks to the accumulation of investments and the compounding effect. For example, a monthly SIP of Rs 20,000 invested over 20 years and assuming a modest 10 percent rate of return results in final corpus of Rs 1.52 crore. This is an investment amount of just Rs 48 lakh! That said, investors should also be aware of the risks associated with investing in mutual funds, especially equity-oriented ones," said Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Mutual Fund (India).