With SIP AUM crossing the Rs. 3-lakh crore mark, investors are realising that this route of investing can help them sidestep behavioural weakness during volatility.
At a time when the stock markets are volatile, retail investors are sticking to their systematic investment plans (SIPs). Data from Association of Mutual Funds in India (Amfi) show that SIP assets-under-management (AUM) has crossed the Rs 3-lakh crore mark for the first time ever—witnessing 18% year-on-year growth in October.
The total net inflows in mutual fund industry in October was Rs. 1,33,482 crore, compared to net outflow of Rs. 1,51,790 crore seen in September this year. Equity schemes have reported total net inflow of Rs. 6,026 crore compared to Rs. 6,609 crore in the previous month and the debt segment saw the largest inflows of Rs. 1,21,140 crore as compared to outflows of Rs. 1,58,032 crore in September.
Retail remains sticky
Retail investors are realising that investing in mutual funds should ideally be for the long-term. N S Venkatesh, chief executive of Amfi says that SIP AUM crossing the Rs. 3-lakh crore mark for the first time ever and the continual rise in SIP accounts are a reflection of disciplined approach adopted by retail investors. “We expect equity markets to perform better in the coming quarters, as the positive impact of government initiatives trickles down in the economy, driving further inflows in mutual funds,” he says.
Equity schemes have the largest number of folios of 620 lakh, which constitute 72% share of the total number of folios. G Pradeepkumar, CEO, Union Asset Management Company, says SIP flows have remained robust even in the face of continued volatility in the market which augurs well for the mutual fund industry as well for the broader markets. “It is also encouraging that there has been about 65% increase in the number of new SIPs added,” he says.
SIPs ideal during volatile phase
To be sure, SIP is an important investment strategy for wealth creation in the long run. In fact, the rise in SIP folios indicate that there is awareness among investors that this route can help them sidestep the behavioural weakness that emerges during volatile market phases. An analysis of CRISIL Equity Fund Performance Index over the 15 years to June 2019 shows that the probability of negative returns declines as the investment horizon widens. Difference between the minimum and maximum SIP returns also narrows with increase in investment horizon.
As an SIP is meant to tide over volatility in the markets, the longer the investment horizon, the better it is. If you start out young, equity funds should constitute around 80% of your portfolio as this asset class has been found to be the best bet for growing money over the long term.
In equity, the largest inflows came in multi-cap category at Rs. 1,312 crore followed by large-cap at Rs. 1,182 crore and mid-cap fund at Rs. 1,091 crore. Alok Agarwala, head of research & advisory at Bajaj Capital says that in equity, almost all categories saw net inflows in October, as market has witnessed strong recovery amidst positive global cues and various reforms measures (including corporate tax rates) taken by the government. “The sentiments in the equity market was supported by the positive global development as the US and China agreed to roll back tariffs as per the new trade deal,” he says.
Arbitrage funds gain
Arbitrage funds are a category of mutual funds that leverage the price differential between equity shares in the cash market and in the stock futures market. They usually generate returns by harnessing the price differential between the two as they buy in the cash market and sell in the futures market. Pradeepkumar says that arbitrage funds, as a category, seem to be continuing to attract investor attention because of their relatively stable returns and tax efficiency.
In fact, in volatile markets, the returns on arbitrage funds are high. The fund manager simultaneously buys shares in the cash market and sells it in futures or derivatives market, and the difference in the cost price and selling price is the return that the investors earns.