ARE INDIAN INVESTORS LOSING INTEREST IN MUTUAL FUND SIPS?

ARE INDIAN INVESTORS LOSING INTEREST IN MUTUAL FUND SIPS?

That can be a rather subjective question and the answer would depend on the data points you look at. If you look at the SIP flows, they have been growing to new highs each month (over ₹32,000 crore a month), so the appetite is still there. However, these are gross SIP flows. A better picture would be if you look at the SIP Stoppage Ratio; which is the ratio of Existing SIP accounts closed to New SIP Accounts opened.

Historically, this ratio used to be 40-45%, but spiked to over 60% during the pandemic. Post-pandemic, SIP Stoppage tapered back to the 40% levels. However, in the last one year, with Nifty and Sensex levels rising, retail investors have been getting jittery. This has led to a sharp rise in the SIP stoppage ratio, going as high as 100% in March 2026. Higher SIP stoppage is not just about Nifty levels. There is more to it.

LET US NOT FORGET SIP PERFORMANCE

Systematic investment plans (SIPs) on mutual funds need to outperform on two counts. Firstly, an equity fund SIP must beat other asset classes in the medium to long term. Secondly, SIP investment must have performed better than lumpsum investments due to the impact of rupee cost averaging. If both these conditions are not met, investors start losing interest in equity mutual fund SIPs.

The table below captures impact of a SIP on the Sensex with the Sensex unit price taken at 1/1000th of Sensex value. The units are credited accordingly. The table shows the unit accumulation and the XIRR returns on the SIP.

What do we gather from the table above? We considered the period from the first major post-COVID peak of September 2021. Ideally, when SIP is started at a peak, it should do better than a lumpsum investment. But that has not been the case.

SIPS ACTUALLY UNDERPERFORMED SINCE THE PEAK OF SEP-2021

The SIP on Sensex should be a fair representation of a diversified equity portfolio. Let us compare how the XIRR (Extended Internal Rate of Return) on the above SIP has performed between September 2021 and May 2026? We will assume (for simplicity) that the investor has contributed ₹10,000 per month to the above Sensex SIP and redeemed the same in May 2026. Here are two important comparisons.

Let us first compare the performance of the SIP on Sensex and a lumpsum investment in the Sensex. If you take the period from September 2021 to May 2026, a lumpsum investment in the Sensex would have given you about 5.83% CAGR returns, while the XIRR (extended internal rate of return) on the SIP on Sensex would have been 5.05%. Clearly, the SIP in this case has underperformed by 78 bps.

What about other asset classes? If you look at the period since September 2021, debt yielded around 7% to 8% on an average on longer maturities. Gold has given returns closer to 16-18% in this period on a CAGR basis. As a result, even hybrid funds have given double-digit returns during this period. Clearly, a SIP on Sensex has been the lagging asset class over the last 5 years.

What should investor do in these circumstances?

FOCUS ON YOUR GOALS, NOT SO MUCH ON RETURNS

There are couple of things that investor need to remember about this SIP performance. 4-5 years is still a short period to judge the performance of an equity fund SIP. The ideal period should be about 10-15 years, which gives a better picture. Secondly, SIPs are not just about returns, but offer a disciplined and systematic process of meeting long-term goals. SIP is not just about the outperformance, but about getting the process in place.

Having said that, there is an important lesson for investors. When you are doing financial planning and imputing expected equity returns over the next 15 years, do not look at aggressive return assumptions of 13-14%. A more realistic return on equity funds in the future would be 10-11% pre-tax and 9-10% post tax. Yes, it is going to get tougher!