By Naliniprava Tripathy and Darshan Gosalia
The development of financial sector strengthens the four pillars of the financial system — efficiency, stability, transparency, and inclusion. Mutual funds play a significant role in the development of the financial sector. A mutual fund pools money from investors and invests in stocks, bonds and other assets in various sectors. An investor can buy fund units from fund companies or through brokers. There are various mutual fund schemes categorised on the underlying asset that the fund invests in – equity funds invest in the equity shares, debt funds invest in fixed income securities, and balanced funds invest in both equity as well as in fixed-income securities. In each of these schemes, mutual funds generally diversify their exposures across various industries and companies. This is done to minimise the risk of exposure to a particular industry or company and to gain from the performance of various industries. Investors can invest in the type of fund best suited for their requirements based on their risk appetite and financial goals. The mutual fund industry highlights the importance of regular investing.
Systematic investment plan (SIP) has emerged as the backbone of the MF industry. SIPs invest in mutual funds wherein a fixed amount is invested periodically at fixed intervals – say once a month, instead of making a lump-sum investment. It is a straightforward and disciplined approach to long-term investing by committing to a fixed sum of investment for a fixed period regardless of the market conditions. Investing in SIPs reduces the effort to manage investments daily and provides expert management. Further, it offers the power of compounding, leading to desired returns over time. SIP helps in rupee cost averaging without worrying about market volatility and timing the market. Rupee cost averaging ensures that more units are bought when the NAV is low and fewer units when the NAV is high. It provides consistent investment in stock markets and helps overcome the impulsive behavior to stop investing in a bearish market or investing a lot in a bullish market.
The recent changes and trends in mutual funds and SIPs offer an interesting study. The assets under management (AUM) of the Indian mutual fund industry has grown from Rs 6.30 trillion in 2010 to Rs 11.73 trillion in 2015 to Rs 25.49 trillion in 2020. It shows a more than 4-fold increase in 10 years and more than 2-fold increase in a span of five years. There was a total of 3.23 crore SIP accounts in India, and a total of ₹7,917 crore investments were made in the form of SIPs in June 2020. This shows the enormity of the size and rate of growth of the mutual fund industry in India.
The net FPI/ FII inflows in India in April 2020 was negative Rs 6,884 crore owing to the COVID-19 slump. However, the situation has improved since then. The net inflows during May and June 2020 stood at Rs 14,569 crore and Rs 21,832 crore, respectively. This trend is likely to continue for the near future primarily due to the Atmanirbhar Bharat programme and anti-China sentiment in many parts of the world. As these would have a positive impact on specific sectors of the Indian economy, the mutual funds having exposure of underlying assets in these sectors would outperform the benchmark. Mutual fund players are optimistic about the future of the industry, which will be driven primarily by retail investors. It is expected that mass adoption will be supported by other factors such as digitalisation and minimum investment amount. Though the current pandemic may bring about a slight impact on the performance of mutual funds, the mutual fund managers would soon rebalance their portfolios to allocate to those sectors and companies that are likely to benefit from the pandemic. This rebalancing may involve increasing the sectoral allocations to healthcare, EdTech, IT/ITES and e-retail, which are expected to perform well post-COVID-19. This would have a direct impact on the performance of the units held by investors, transferring the benefit of rebalancing to the investors.
Drawing specific references to the impact of Covid-19, the SIP inflows for June 2020 shows several trends that capture investor sentiment and behavior. SIPs are witnessing two significant trends in recent times. The first significant trend relates to the number of SIP registrations. Though the new SIP registrations have increased, there is a simultaneous increase in the redemptions and closures. The new SIP registrations witnessed a low of 7.5 lakh in April 2020 as an immediate impact of the setting in of the bear markets in March 2020. However, the number of new registrations clocked 8.08 lakh and 9.13 lakh in May and June, respectively. On the other hand, the number of SIP closures also increased during this period, reaching 6.58 lakh in June.
The reason for this trend can be understood by looking at the types of investors and their actions in response to the pandemic. There are two major categories of investors – first, investors whose salaries are not impacted, but have reduced their discretionary expenditure, and the second, investors who have witnessed a reduction in their income as a result of the pandemic. For the first category of investors, there is a rise in savings. With markets returning to normalcy, these savings are channelised into mutual funds. The second category of investors are either canceling their SIPs or going for redemptions to meet their expenses. Thus, the existence of these two categories of investors has led to a rise in new registrations coupled with a rise in redemptions of SIPs. The second major trend is the decline in the average ticket size of SIP investment despite a net increase in the number of SIP registrations. The average ticket size stood at Rs 2,769 in March 2020, and it has steadily fallen to Rs 2,447 in June despite a rise in the number of registrations to 3.23 crore.
This can be attributed to several factors. Firstly, several HNIs and UHNIs have moved to equity investments from SIPs to benefit from the market conditions. The closure of their large ticket size accounts led to a fall in the overall ticket size. Secondly, the addition of new SIP accounts had a lower ticket size, which led to a reduction in overall average ticket size. Lastly, some of the existing investors cut the quantum of SIP investment to reduce the outflow while continuing to enjoy the benefit of the lower net asset values.
Stamp duty was introduced on the purchase of mutual fund units (whether through lump sum investment, SIP, switch-in, or dividend reinvestment) and on the transfer of mutual fund units (other than by way of redemption) with effect from July 1, 2020. Considering the minuscule percentage of stamp duty being levied, it would not have a significant impact on the investments in mutual funds and SIPs.
Looking at the latest trends in SIPs and mutual funds, it can be said that investing in SIPs is a rewarding investment for retail investors. Mutual funds offer better returns than most other financial instruments. Investors should continue to invest in SIPs depending on their risk appetite and financial goals.
(Dr Naliniprava Tripathy is Professor (Finance) at IIM Shillong. Darshan Gosalia is a PGP student at IIM Shillong.)