SIP stoppage ratio bounces back to 56.94% in FY23

The growing world of SIP investments

Systematic investment plans (SIPs) have emerged as one of the most efficient and effective methods for investors to participate in mutual funds in a systematic manner. The numbers bear eloquent testimony. In the just concluded FY23 fiscal, SIP collections stood at Rs1.56 trillion with the March SIP flows crossing Rs14,000 crore for the first time ever. In April 2023, the SIP flows were Rs13,728 crore; slightly lower than in March but still robust. The FY23 SIP flows were already 25.2% higher than FY22 and 62.3% higher than FY21. Investors are gradually realizing that it is time in the market and not timing the market that really matters. That is best captured by SIPs, especially on equity funds

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SIPs pick up; and more since the pandemic

SIP collections on a monthly basis give a very short term picture of SIP flows. A better perspective would be to look at the SIP flows for the last few years and the average monthly SIP flows. Here we look at the SIP flow data for the last 7 financial years.

Data Source: AMFI

In the above table you can see that between FY17 and FY23, the average SIP flows have grown from Rs3,660 per month to Rs12,998 per month, a growth that is nearly four-fold. Despite an intermediate slowdown in SIP flows in the COVID period, the SIP flows bounced back quite sharply post-COVID to touch new highs. It is clearly a case of the retail investors, especially the millennial young investors, opting for the SIP route. However, there is a problem. The numbers that you see are gross SIP flows and not SIP flows and there is a lot more insights available if you look at the net SIP flows. Here is how.

Why you must look at net SIPs over gross SIPs

There is a slight discrepancy in the way mutual fund data is reported by AMFI. For instance, the equity and debt fund flows are reported monthly on a net basis while the SIP flows are reported on a gross basis. Hence, comparing gross SIPs with net equity flows can give a misleading picture. Here we look at how the net SIP figures look.

• In FY23, the gross SIP flows stood at Rs155,972 crore. In contrast, the net SIP flows (net of SIP stoppages and redemptions) for FY23 were only Rs84,224 crore. That means; the net SIPs were approximately 54% of the gross SIP inflows. 
  
   
• However, the news is not all that bad. Despite the apparently low ratio of net SIPs, these numbers have shown perceptible growth over the previous year. Net SIP flows in FY23 stood at Rs84,224 crore which is 77% higher than the net SIP flows of Rs47,619 crore in FY22. More importantly, the net to gross ratio is also up from 38% in FY22 to 54% in FY23.

Why is this gap between gross SIP flows and net SIP flows and what are the reasons for this varying ratio. For that, we need to understand the SIP stoppage ratio. 

SIP stoppage ratio has bounced back sharply in FY23

An oft-ignored piece of data in mutual fund flows is the stoppage ratio and that is a rather important ratio as it shows the stickiness of SIPs. Obviously, the longer SIPs stay the better it is as the easiest customer to acquire in any business is the existing customer. Now let us turn to the SIP stoppage ratio. It is the ratio of the number of SIP accounts discontinued to the new SIP accounts opened in a particular period of time. It can be in a year or in a month. The SIP stoppage ratio is the barometer of stickiness of SIP investors and is indicative of the level of the market and the level of uncertainty in the market. Lower the SIP stoppage ratio, the better it is as it shows that fewer SIPs are being discontinued or are failing to renew. The table captures the SIP stoppage ratio over the last 5 fiscal years.

Data Source: AMFI

The last shaded column for FY2023-24, is only for a month and not comparable with previous years. But this ratio will cumulatively give a correct picture as the year progresses. The spike in SIP stoppage ratio during FY20 and FY21 was understandable. It was triggered by COVID uncertainty and withdrawals for emergencies. However, you can also see a sharp fall in FY22, which presented a more stable macro scenario. That led to the SIP stoppage ratio dropping to 41.74%. However, the concern is that SIP stoppage ratio has bounced back to 56.94% in FY23. Ideally, this ratio should be in the range of 40% to 45% and the FY23 figure is much above that. In April 2024, this SIP stoppage ratio has further spiked to 67.54%; which is tad too high for comfort.

The real story of Indian SIPs may not be about the stoppage ratio but about the immense potential. Here is a $3.5 trillion economy, poised to become $5 trillion in 5 years. If you take the number of SIP folios at 6.5 crore and compare that to the number of life policies, number of bank accounts or mobile connections; SIPs have hardly penetrated. That is also the untapped opportunity in mutual fund SIPs.

Content Source: AMFI India Website