What is driving SIP flows and what are the risks?

How SIPs are driving MF flows

It took a long time for the monthly SIP flows in India to cross the Rs.10,000 crore mark. But once it was crossed, it has sustained for 3 months in a row. It is not just the SIP flow but the average monthly SIP ticket is also going up. This is thanks to the lakhs of young investors and well-heeled millennials who are now entering the professional market. Many of them are tech-savvy and financially savvy and they automatically gravitate towards mutual funds and SIPs. But what is interesting is not just the SIP flows but even other high frequency measures like the SIP AUM and the SIP folios which are more indicative of mass retail participation. For example, the total number of SIP folios stand at 4.78 crore at this point. Mutual funds have been adding around 15 lakh SIP folios on a net basis each month. Then there is the SIP AUM which is close to Rs.5.50 trillion. What is more, the SIP AUM now accounts for 41.4% of equity AUM and over 30% of overall retail AUM. All this points to the fact that SIPs have arrived and they have arrived with a bang. But this deluge comes with some risks too.

What if prolonged down cycle

Ask any millennial investor and the standard problem is that they have never really seen a prolonged down cycle in the markets. The last such cycle was in 2008 and most millennials were not in the market at that point of time. Since the year 2013, the markets have been moving steadily up, even if you factor in the sharp correction due to the COVID syndrome. The undertone has been bullish. So, you have an army of young investors who have never known what it means to see your NAVs languish for a long time when markets trend lower after each SIP. Such a cycle can be a great leveler for investors.

It is also about the TINA factor

Most of the millennials in the market have grown up with the belief that debt can never yield exciting returns. That could now change in the US where inflation is at a heady 6.8%. Millennials have gravitated towards equities due to the absence of lucrative choices. This has been like a vicious cycle. Equities are attractive, so more investors are flocking in and because of that returns are more attractive. This cannot really go on forever. If debt yields once again start to turn attractive, you could suddenly see a shift in investor bias from equities towards debt. That is the bigger risk for this fairy tale SIP story. There is just too much optimism in the markets and that is not a good thing!