SIP wave hits record level, more to come

India’s mutual fund (MF) industry had barely any retail footprint when it completed 50 years in 2013.

MFs had Rs 7 trillion in assets under management (AUM) in March 2013, of which around Rs 5 trillion was in institution-focused debt funds.

By comparison, bank deposits in the country stood at Rs 67.5 trillion around the same time.

A lot has changed since then.

The industry’s AUM touched a record Rs 50 trillion in December 2023 on the back of steady growth in systematic investment plan (SIP) accounts.

At the end of 2023, AUM tied to SIPs alone was Rs 10 trillion.

Industry experts say there is a lot more to come.

“Despite the progress in recent years, we are nowhere closer to what the potential is.

"MF investors are still small as compared to demat account holders,” says Misbah Baxamusa, chief executive officer (CEO), NJ Wealth.

Strong foundation

Equity schemes, the preferred retail product, were managing just Rs 1.7 trillion in March 2013, shows data from the Association of Mutual Funds in India (Amfi).

MFs’ failure to take off in the retail segment prompted the regulator to introduce steps in September 2012 to “re-energise” the industry.

The measures included incentives for MFs getting substantial flows from places beyond India’s top 15 cities, low cost direct plans, and widening the distribution pool.

The new regulations created a platform for retail use of MFs, but it was only in 2017 that momentum picked up.

It was the time when banks were flush with liquidity and had cut fixed deposit rates after demonetisation in November 2016.

As bank deposits lost their appeal, the equity market was scaling new highs.

According to executives, there was another factor in the mix that led to the ‘perfect storm’ for the MF industry in 2017.

An industry advertisement (ad) campaign was launched to reach out to prospective customers.

Given the campaign called ‘Mutual Fund Sahi Hai’ is funded by the industry, it had the finances to feature in television, digital, and print media over the years.

MFs, which have to compulsorily set aside 2 basis points of their total AUM every year (Rs 980 crore, according to present AUM) for investor education, send half of it to Amfi, which runs the campaign.

This campaign, along with passive promotion, is believed to have played a major role in making MFs a mass product. However, the gist of MF promotion and sale has always been the same: “Put in small sums into MFs on a regular basis and achieve your financial goals”.

Airing the same message persistently through different channels and forms had the intended results, say MF executives, citing the growing popularity of SIPs.

The campaign’s slogan is even more popular than MF itself in some places.

“Many a time I have come across people who have no idea what an MF is but say they have been investing in SIPs,” said a Bihar-based MF distributor.

“While planning the ad campaign at an industry level, the first step was to set boundaries for Amfi and MFs.

"It was decided that Amfi’s job would be persuasion and MFs would take it forward and persuade investors through their own campaigns and investor education,” said Gaurav Suri, a former UTI MF executive who was a part of the Amfi team that designed the initial campaigns.

“One of the points we wanted to highlight through the campaign was how you can start with small amounts and how SIPs can help you meet your different goals.

"This association of SIPs with goals is also a factor that’s boosting the SIP count,” he said.

Advantage, SIPs

SIPs have become a primary investment option, at least for young Indians, and pushed the industry’s growth in recent years.

Money flowing into MFs through the SIP route now accounts for 20 per cent of the total assets at Rs 10 trillion, up 9 per cent since 2018.

SIPs’ share in MF inflows has grown from around Rs 7,500 crore in February 2021 to a record Rs 17,610 crore in December 2023, shows Amfi data.

Apart from media promotion, MF executives attribute the popularity of SIPs to their advantage compared to lump sum investments and similarity to recurring deposits (RDs).

“MF houses have actively promoted SIP as a flagship product offering to investors.

"Also, SIPs are often marketed as a tool for risk mitigation through rupee cost averaging.

"This aligns with MFs’ diversified and professionally managed nature, reinforcing the connection between SIPs and MF investments,” said Vishal Kapoor, CEO, Bandhan MF.

“RDs were always popular in India. Hence, people have found it easier to relate with SIPs.

"There’s added flexibility when it comes to SIPs — you get to pause investments and even withdraw in a few clicks.

"The message that SIPs are the best way to invest in a volatile asset class like equities is also drawing more interest to them,” said Jimmy Patel, CEO, Quantum MF.

The SIP route resulted in a sharp increase in MF investors after the pandemic.

The unique investor count has doubled since March 2020 to 40 million.

Riding digitisation

SIPs’ popularity owes a lot to the digitisation of the economy after Covid-19 hit the country in 2020.

Direct investing applications (apps) like Groww and Zerodha Coin were there since 2017, but it was only in 2020 that they started gaining traction, Google Search data shows.

Such apps made it easy for people to try their luck in the equity market, through the direct route and MFs.

The market returns were attractive and promotion campaigns added to the appeal of equities.

There were other factors too.

Some well-documented ones include a surge in savings, declining interest rates of bank deposits and other fixed-income options, and enough time to try out investing and trading as people were stuck at home.

There were 12 million direct plan investment accounts in MFs in March 2020 and increased by 48 per cent to 18 million by the end of March 2021.

Alongside, active investment accounts in regular plans went up 2.8 per cent to 79.4 million.

Most direct plan selling happens on apps, while regular plans are sold by distributors.

“With digitisation, MF transactions became a lot easier.

"This was also facilitated by the entry of financial technology players.

"Thanks to the adoption of technology, the industry was prepared when the pandemic arrived in 2020.

Many people had surplus income as their expenses went down during the initial Covid phase and they had the option to invest in MFs via their mobile phones.

This led to a new phase of growth,” said G Pradeepkumar, CEO of Union MF.

Affordable internet ensured that distributors could continue their work, even when the country was locked down to contain the spread of Covid.

Beyond big cities

SIP account additions in rural areas (beyond top 30 cities, or B30) has been higher than in the top 30 cities (T30) for some years now.

Recently, the number of active SIP accounts in B30 has gone past the T30 tally.

As of November 2023, the B30’s SIP count stood at 38.2 million compared to 36.1 million for T30.

As MF penetration in top cities remains low, the industry and the regulator are focusing on smaller places.

The MF regulations until last year even allowed asset management companies to pay extra incentive to distributors bringing new investors from B30.

In an effort to build market in smaller towns, many fund houses have increased their branches.

They say physical presence is crucial to win over the trust of rural investors and connect with distributors.

“The MF penetration has just about managed to reach critical mass.

"We are adding new investors at a good pace, thanks to growing awareness.

"However, this momentum is susceptible to equity market volatility.

"Further growth will largely depend on how quickly the industry can augment its distribution strength,” said Manish Kothari, CEO, Zfunds, a regular plan distributor that works on a sub-broking model.

“I think direct platforms are doing a good job in their segment of the market, which is urban millennials and Generation Z.

"This is only a section of the market. There are a lot of people who are not tech savvy and need guidance to be able to invest in MFs.

"This is where there’s a lot of scope and only individual distributors and can cater to this market,” he said.

Benefits for all

A consistent and predictable flow of money into MFs benefits distributors, fund managers, and even the market.

SIPs ensure customer stickiness for distributors, ease fund deployment for fund managers, and reduce volatility in the market, point out experts.

MFs have deployed over Rs 1.5 trillion in each of the past two calendar years (2022 and 2023) due to consistent SIP flows.

The flows brought a change in market trend in 2022, making it a rare period in the Indian equity market when sharp outflow of foreign money failed to make a large-enough impact.

“Given the advantages, SIPs help distributors create a happy client base.

"Business wise also, they make better sense.

"You have to put in efforts once and sales happen every month automatically next month onwards,” said Baxamusa.

However, investors need to consider situations that may steal away the gains.

“SIPs in MFs is a good way to make money, but it needs time and patience.

"Most people want to make money fast,” said Baxamusa.

Kapoor said, “The SIP story is not immune to market risks.

"Investors who entered the market after witnessing impressive past returns may be more susceptible to emotional reactions during a market downturn.

"Panic selling during a crash could undermine the long-term benefits of SIPs.”

In other words, holding on in difficult situations is as important as investing in SIPs.