As the debate over data on gross and net flows into systematic investment plans (SIP) rages on —AMFI discloses only gross SIP flows into mutual funds each month — Saikat Neogi explains why the net figure is needed to provide a clearer picture of the underlying market dynamics
Net-to-gross SIP ratio around 40% since January
THE NET-TO-GROSS SIP ratio has been around 40% since January 2024 (it hit 38% in July, a seven-month low) despite higher gross inflows, indicating that a significant portion of gross SIP inflows is
being offset by redemptions. Higher the outflows, lower will be the ratio. For instance, in July, while the gross inflows in SIPs touched a new high of `23,332 crore, net SIP flows were only `8,964 crore. As the markets touched all-time highs, individuals redeemed their investments fearing a market correction.
To be sure, net flows are adjusted for outflows which often include redemptions accumulated over several months or even years, rather than just from the current month. This adjustment means that while gross inflows reflect new investments for the month, net flows show the remaining investments after accounting for these redemptions.
In fact, the net-to-gross SIP ratio had touched 70% in June 2022, indicating lower redemptions.
Reasons for high redemptions
MANY INVESTORS MAY be locking in profits due to the market’s strong performance. Rising interest rates have also made fixed-income instruments more attractive, prompting some to reallocate funds. Withdrawals could be driven by personal financial goals also. Even the increase in SIP cancellations is primarily due to investors achieving their financial goals sooner. Some investors may be redeeming SIPs as they reach maturity or to reinvest in new fund offers. Additionally, some investors lack the financial capacity to continue funding their SIPs beyond six or seven months, despite initially starting them because of the ease and accessibility provided by investment apps. These factors collectively contributed to the trend of lower net flows despite strong gross SIP investments.
Calculating gross and net flows
GROSS SIP inflows are the total amount of money that investors put into their SIPs during a particular month. This figure represents all the new investments made by SIP investors across various mutual fund schemes without any adjustments for redemptions or withdrawals. While gross SIP data reflects investors’ interest and market enthusiasm, it does not account for SIPs that have been closed or discontinued.
Net SIP flows, on the other hand, are calculated by taking the gross SIP inflows and subtracting the amount of money withdrawn from SIP accounts during the same period. However, calculating and reporting net SIP data is more complex, as it requires tracking cancellations and redemptions for each fund. To be sure, gross inflows in SIPs account for money invested by retail investors, mostly in equity-oriented schemes.
Are the two numbers really comparable?
GROSS AND NET SIP flow numbers do not offer a like-to-like comparison due to the differences in what they represent. While the Association of Mutual Funds in India (AMFI) reports the gross SIP inflows, the net SIP flow data publicly available is based on redemption data released by mutual fund registrars.
The reason why the AMFI does not disclose net SIP data is that the redemptions involved in calculating net SIP inflows often include units that have been accumulated over several months or even years. This accumulation makes net SIP figures less reflective of the current month’s investment activity and can create a misleading comparison with the gross inflow figures, which strictly represent new investments for that particular month. In fact, the industry prefers to highlight gross SIP inflows because they provide a clearer picture of ongoing investor interest and activity in mutual funds, without the complicating factor of redemptions from prior investments.
Why AMFI need to disclose net SIP data?
AMFI DISCLOSES GROSS SIP data likely to present a more positive outlook on the mutual fund industry by showcasing the total investor interest. This approach is more encouraging for potential investors as it highlights growth. However, experts say from a practical standpoint, net SIP data would provide a clearer picture of actual market dynamics, as it accounts for the attrition rate in SIPs. The reluctance to disclose net SIP data may stem from concerns that it could portray a less optimistic view of investor behaviour, impacting market sentiment.
“In fact, Amfi might be concerned that disclosing net SIP data could create negative market sentiment, as it might highlight the challenges faced by the industry, such as cancellations and redemptions,” says Sonam Srivastava, founder, Wright Research. Similarly, Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor, says net SIPs will offer a more accurate representation of sustained investor commitment.