When the market turned topsy-turvy in May due to the Lok Sabha elections, many retail investors stopped their systematic investment plans (SIPs), data from the Association of Mutual Funds in India (Amfi) showed. As a result, the SIP stoppage ratio shot up to a record high of 88.4% in May.
Interestingly, this is despite the number of overall SIP accounts hitting new highs and SIP inflows into the market continuing to climb new peaks month after month.
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As per the data, 4.97 million new SIPs were registered in May, while 4.39 million SIPs were discontinued or their tenure got completed. This means the SIP stoppage ratio, which is the ratio of SIPs discontinued to the new SIPs registered, was 88.4% in May. This was significantly higher compared with the SIP stoppage ratio of 52% seen in April and 54% in March.
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“If you look at the last two years, the money has flown into smallcaps where many investors would’ve put in money out of the fear of missing out on the market rally. Now, if we are seeing high stoppages, it’s just showing the risk profile,” said Swarup Anand Mohanty, vice-chairman & CEO of Mirae Asset Investment Managers India.
Equities saw heightened volatility in May as the voting for the Lok Sabha polls that was underway raised some uncertainty over the results. This could have propelled some investors to go for redemption, market participants said.
Benchmark Sensex gyrated 4,143.67 points or 5.8% in May as it hit a lifetime high of 76,009.68 points and also fell to 71,866.01 points. The broader market indices saw even sharper swings. The BSE Midcap index gyrated 9.3% in May, while the BSE Smallcap index moved 8.7% between its high and low.
Moreover, the SIP discontinuations have been rising since March, when the valuation concerns were at a peak in the market. In fact, small-cap mutual funds saw net outflows in March for the first time since September 2021 after the Securities and Exchange Board of India (Sebi) raised concerns about valuations and directed the fund houses to conduct stress test for the category.
In FY24, small-cap funds saw net inflows of `40,000 crore and the assets under management (AUM) of this category of funds soared 82.5%, driven by higher inflows as well as mark-to-market gains. Comparatively, the AUM of large-cap funds rose 33.3%.
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“The extreme euphoria among non-institutional investors has resulted in steep increase in stock prices of mid-cap. and small-caps over the past 15 months and distended valuations across sectors,” Kotak Institutional Equities said.
In May, SIP inflows into equity mutual funds hit a fresh record of Rs. 20,904 crore against Rs. 14,749 crore in May last year.
Industry participants believe that while investors should make sure their portfolio reflects their risk profile properly, they should ideally not discontinue SIPs.
Mohanty said investors should ideally continue their SIP notwithstanding the short-term volatility considering that their investment horizon would be longer period.