Indian benchmark indices have defied expectations, surging to record highs here, brushing aside political uncertainties and coalition government worries. This ascent, largely fuelled by robust domestic investment and short covering by foreign institutional investors (FIIs), paints a picture of market resilience. However, beneath the celebratory surface, a less sanguine trend is brewing – a sharp rise in Systematic Investment Plan (SIP) closures.

SIP Boom or Bust Cycle?

For months, the consistent flow of funds through SIPs has been a bedrock of the Indian market’s strength. May 2024 witnessed net inflows reaching a notable Rs 20,904 crore, an 11-month peak. Retail investors, increasingly financially aware, are favouring equity markets via SIPs over conventional savings. Mutual funds’ share in total investments has jumped impressively, reaching over 6 per cent in FY24, up from a mere 1.3 per cent in FY21. This shift underscores a growing confidence in market-linked investments among the common populace.

Yet, recent data from the Association of Mutual Funds in India (AMFI) casts a shadow. New SIP account registrations have dipped, falling to 49.74 lakh in May from 63.65 lakh the prior month. More alarmingly, SIP discontinuations have surged by 32.21 per cent, reaching 43.96 lakh from 33.25 lakh. This has driven the SIP stoppage ratio to a record 88.38 per cent in May, surpassing even the pandemic peak of 80.69 per cent seen in May 2020. Essentially, for every ten new SIP accounts opened, nearly nine are being closed. This high closure rate suggests a significant churn, with older investors exiting almost as quickly as new ones enter. Is this a sign of fatigue, or something more concerning?

NFOs Masking Deeper Issues?

While the closure ratio is worrying, net SIP inflows in rupee terms remain strong. A significant portion of these new inflows is attributed to New Fund Offers (NFOs), such as the HDFC Manufacturing Fund, which alone garnered around Rs 9,500 crore, including substantial SIP commitments. Are NFOs masking a deeper underlying issue? Are investors simply chasing the ‘new’ and ‘shiny’, without a long-term commitment to the market? This trend raises questions about the quality and sustainability of the current SIP boom. While NFOs can bring in substantial initial investments, their contribution to long-term market stability needs closer scrutiny.

Fragile Foundation?

Foreign investors continue to withdraw from Indian markets, making domestic investment the primary support pillar. If this domestic support, particularly from retail investors via SIPs, begins to waver, the market could face considerable challenges. New investors, with a higher average cost of holding compared to long-term players, are more susceptible to panic during market corrections. The high SIP closure ratio could be an early indicator of this vulnerability. While some investors may be pausing investments or booking profits given market consolidation and election outcomes, the scale of closures is noteworthy.

Is this elevated SIP closure rate a temporary blip, or the start of a worrying trend? The coming months will be crucial in determining whether this is a mere pause or a sign of deeper investor unease. For now, caution, not complacency, seems to be the prudent approach. Keep a close watch on market sentiment and SIP flow data to gauge the true strength and sustainability of this market rally.

Image Courtesy: X (Mutual Funds Sahi Hai)