With rising stock markets, retail investors are increasingly investing in systematic investment plans (SIPs) of mutual funds. Investors are also taking the SIP route to invest in individual stocks through brokerage houses. Investors are switching to equity SIPs as returns from fixed deposits, small savings schemes and even gold are falling. While SIPs of mutual funds are also available in debt funds, investors are preferring equity SIP because of double digit returns given by most funds in the last one year.
SIP by SIP
The popularity of SIPs can be gauged from the fact that in FY17 the mutual funds industry added 6.26 lakh SIP accounts each month. Average SIP amount was Rs 3,100 per account. Even individual investors from small towns are investing in SIPs. A survey by Securities and Exchange Board of India (Sebi) in April this year shows that nearly 60% of regular mutual fund investors are now investing via SIP. FY 2016-17 has started with strong inflows into equity mutual funds (including ELSS). In April, net inflows in this category was Rs 9,429 crore, which is more than twice the April 2016 inflow and 61% higher than past 12-month average. The trend is interesting given that the April-June quarter is a lean season for investments.
Analysts say SIPs have been gaining popularity among Indian mutual fund investors in the last three years. In fact, the number of folios, or individual investor accounts in mutual funds, increased to a record 5.54 crore at the end of March 2017, from 4.77 crore in March 2016, according to data from Association of Mutual Funds (Amfi). In the individual category, around 26% of the investments come from B-15, or beyond top 15 cities, indicating rising investments from small towns.
Equity assets under management (AUM) now constitute 26% of aggregate mutual fund AUM. A report by Deutsche Bank shows that on an average, equity AUM has been 23% of aggregate mutual fund AUM over the last 15 years. This was 37% in December 2006. “If the economic growth momentum revives and retail enthusiasm builds further, there is a likelihood of higher share of equity AUMs for mutual funds,” says Abhay Laijawala, analyst, Deutsche Bank.
Benefits of SIPs
SIPs allow an investor to buy units on a given date each month. One can start with a minimum amount of `500. The biggest advantage of an SIP is that the investor doesn’t have to time the market. Investing every month ensures that one is invested during the highs and the lows.
To be sure, SIPs make the volatility in the market work in favour of an investor and help average out the cost. For instance, with Rs 1,000, one can buy 50 units at Rs 20 per unit or 100 units at `10 per unit, depending on whether the market is up or down. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units are bought when the NAV is high. When the two situations are analysed together, the cost is averaged out and, the longer the time-frame of the investment, the larger will be the benefits of averaging.
Moreover, SIPs have the advantage of compounding—one must start investing at an early age as longer the investment horizon, the bigger the benefits. If you start early, equity funds should constitute around 80% of portfolio as this asset class has been found to be the best bet for growing money over the long term.
Stock SIP are offered by brokerage houses like HDFC, IIFL, Geojit Securities which help retail investors to invest in stocks directly in a staggered manner. However, such investments are usually done by those who have knowledge on stock markets as they have to shortlist the stocks themselves and invest.