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Mutual funds: Why SIPs remain the best bet in volatile times

Outflows were reported in the aggressive hybrid funds, equity savings funds and conservative hybrid funds. Agarwala says aggressive hybrid funds had reported outflows for last few months as the segment has lost its charm after dividend distribution tax was imposed in Union Budget 2018.

Mutual fund, SIP, volatile time, AUM, money news, net equity inflow
In equity funds, almost all categories saw fall in net inflows in November as investors preferred to book profits as market have witnessed strong recovery.
Mutual fund, SIP, volatile time, AUM, money news, net equity inflow
In equity funds, almost all categories saw fall in net inflows in November as investors preferred to book profits as market have witnessed strong recovery.

For mutual funds, net equity inflows in November crashed to Rs 1,312 crore, the lowest since June 2016 as the two biggest equity indices hit new highs; poor performance by some funds and slowdown in the economy prompted individual investors to redeem their units.

However, interestingly, monthly collections through systematic investment plans (SIPs) hit an all-time high of Rs 8,273 crore. The industry added five lakh SIP accounts in the month and it is the twelfth consecutive month where SIP inflows were over Rs 8,000 crore.

The assets under management (AUM) of mutual funds increased by Rs 71,875 crore to touch Rs 27.05 lakh crore in November from Rs 26.32 lakh crore the previous month. In equity funds, almost all categories saw fall in net inflows in November as investors preferred to book profits as market have witnessed strong recovery.

Outflows across equity categories
Outflows were reported in value category, thematic/sectoral category and large and mid cap category. However, large-cap, mid-cap, small-cap and focused categories continue to witness healthy inflows. “The weak sentiments in the equity market changed as the government took a series of measures, including corporate tax rate cut, to bring back the economic growth at the normal level,” says Alok Agarwala, head, Research & Advisory, Bajaj Capital.

Even the hybrid category reported net outflows of Rs 572 crore compared to net inflow of Rs 314 crore in October. Outflows were reported in the aggressive hybrid funds, equity savings funds and conservative hybrid funds. Agarwala says aggressive hybrid funds had reported outflows for last few months as the segment has lost its charm after dividend distribution tax was imposed in Union Budget 2018. Also, conservative hybrid funds and equity savings funds continue to witness net outflow since last 9-10 months. “Many funds of these categories were also impacted due to recent spate of debt defaults and subsequent downgrades,” says Agarwala.

Joseph Thomas, head of Research, Emkay Wealth Management, says there is some amount of profit booking by investors who have invested much earlier as they may be expecting better levels or opportunities later. “The fact that GDP growth is quite low and therefore, the expected earnings too, may be prompting investors to wait for a little more while till they see the green shoots. The best approach to investing at this juncture will be a phased one over time focusing on quality portfolios and reasonable value based on objective earnings estimates, ” he says.

Continue with SIPs
While investors should book profits when markets rally, they should continue with SIPs as it is an important investment strategy for wealth creation in the long run. 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.

The mutual funds industry has about 2.94 crore SIP accounts which helps in rupee cost averaging. The investment is done in a disciplined manner without worrying about market volatility and timing the market. Data from AMFI show that the industry had added 9.55 lakh SIP accounts on an average each month during FY19-20, with an average SIP size of about Rs 2,800 per account.

In fact, the rise in SIP folios indicates 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 probability of negative returns declines as the investment horizon widens.

In fact, investors who understand the power of compounding end up making money over a period of time. Very importantly, tax efficiency kicks in when invested for the long term. Analysts say the performance of equity and bond markets over long periods shows that risk of capital reduces significantly. So, even in volatile times, individual investors must continue to invest through SIPs and link it to various financial goals.

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