Investors and advisors must address the SIP Closure Ratio
For the month of March 2020, the SIP closure ratio rose to a yearly record of 70%. To put that in perspective, for every 10 new SIPs that are opened, 7 of the existing SIPs are closed. The SIPs are still increasing but at a much slower rate. That is the key takeaway.
Why SIP closures matter
The SIP closure trend has typically varied between 50% and 70% in the last one year. This ratio is an indicator of the underlying momentum in SIPs in mutual funds. SIP closures matter as these are predominantly equity and ELSS contributions and are supposed to be part of the long term portfolios of individual investors. It also is a measure of the level of conviction investors still have on equity as an asset class.
SIPs have become central
There are a number of reasons why SIPs have become critical. Firstly, the growth in MF AUM from Rs.8 trillion in 2014 to Rs.27 trillion in 2019 was driven by SIPs. Secondly, SIPs account for nearly Rs.8500 crore of flows into equity funds each month and they have been the reason for positive flows into equity funds. Lastly, SIPs are normally linked to long term goals. Investors use the SIP route to create wealth via equities in the long run. It offers diversification with professional management. When investors discontinue SIPs, they lose out on long term wealth creation.
What advisors need to do?
If ever the financial advisors must stand up to their investing SIP clients, this is the time. Panic in the markets is quite normal. Most investors have not seen a 30% correction in the Nifty in a month and the panic reaction it normal. This is the time to sit with clients and work out options. Can they manage the budget better to continue the SIP? Can they look to temporarily cut down the SIP size? Can mutual fund AMCs offer their clients a SIP moratorium just like banks are offering an EMI moratorium? They may lose out the rupee cost averaging for 3 months but at least they don’t lose out on the long term wealth creation potential of equities. It is time for AMCs and advisors to think out of the box.
What investors must do?
If ever investors have to take measured decisions, it is now. There are enough empirical studies to show that a SIP that is continued with discipline through the market vagaries comes out smarter and even stronger. Also, your long term goals like retirement and daughter’s college would still remain in the future. The need of the hour is not to look at your long term SIPs as a liquidity raising tool. That would be a disservice to your own financial future. You can choose between budgeting and temporary hold on SIPs till liquidity improves. Rising SIP closure ratio is just a sign of panic. You must still take a calibrated view!