Micro SIPs in Mutual Funds: Is It a Good and Feasible Idea?
September 25, 2024 Mutual Fund
The data of the Association of Mutual Funds in India (AMFI) reveals that a predominant portion (over 60%) of the Indian mutual fund industry’s assets comes from individual investors.
Individual investors are deploying their money into equity-oriented mutual fund schemes in the desire to earn better returns as opposed to investing in bank Fixed Deposits (FDs) and other interest-yielding investment instruments.
According to a Franklin Templeton report as of August 2024, the share of Assets Under Management (AUM) of mutual funds grew over 31% of the size of bank deposits (which is a concern for Indian banks). This is mainly due to the bullish or upbeat sentiments in the market and continuous steady flow through the Systematic Investment Plans (SIPs) – a convenient mode of investing in mutual funds.
In August, SIPs accounted for 27.4% of equity AUM, up from 26.9% a year ago, according to the Franklin Templeton report. The AMFI data also reveals that the SIP AUM has climbed to Rs 13.4 lakh crore as of August 2024, while the SIP folios to 9.61 crore.
Moreover, interestingly, as per the AMFI data, it is not just the Top 30 (T30) locations but even the B30, i.e. locations beyond the T30, who are participating. So, there is a mix and, currently, 27% of the individual assets are from the B30 locations. It appears no one wants to miss the bus and the kind of returns mutual funds have clocked in the last couple of years.
What has led to the increasing participation of the B30 cities besides the upbeat market sentiments is the sachetisation of mutual funds — just like the way a host of consumable products are marketed today.
For greater financial inclusion, the SEBI Chief, Ms. Madhabi Puri Buch has suggested bringing down the minimum investment in SIP to as little as Rs 250 per instalment over the next three years by leveraging on technology. In other words, what is being proposed is offering Micro SIPs. This in her view will allow greater participation in mutual funds from the bottom of the pyramid and is in keeping with the market regulator’s objective of greater financial inclusion.
Simply put, lowering the minimum investment for SIPs shall result in the next phase of growth of SIP AUM. At present, SIPs as low as Rs 100 are offered by only a few fund houses but most others permit Rs 500 as the minimum SIP instalment.
In advanced economies, such as the U.S., mutual funds allow investment as low as US$ 5, US$ 10 and so on, while a majority of the fund houses require a higher initial investment between US$ 500 and US$ 5,000. This is why a large section of the population in the United States (46%) have investments in mutual funds, while in the case of India, it is just around 8%.
So, there is much merit in offering Micro SIPs which can encourage a large section of India’s population from the lower class and lower-middle class to invest in mutual funds. At present, it is mainly the middle class, upper-middle class and the affluent who have investments in various mutual fund schemes.
As per Franklin Templeton’s latest report, 92% of India’s SIP folios have a ticket size of up to Rs 5,000. This is an important data point, considering that SIP AUM has increased over the years with positive net SIP contributions. The SIP accounts added have exceeded those that are discontinued, and a large chunk of the folios (73%) are in SIPs between Rs 500 and Rs 3,000. If Micro SIPs are offered going forward by many mutual funds, SIP folios and AUM are likely to swell.
Several mutual fund CEOs concur with Ms. Buch’s view on allowing Micro SIP but believe that it needs to be thought through well citing the costs involved in the case of Micro SIPs.
Should You Invest in Micro SIPs?
Sachetisation of mutual funds by allowing Micro SIPs is a good idea and a step in the right direction. It will allow access to a large section of India’s population to invest in mutual funds. In other words, Micro SIPs shall enable the broaden its investor base.
However, the key is educating investors to link their investments with the envisioned financial goals.
In addition, the Indian mutual fund industry needs to provide easy-to-understand products, particularly diversified equity funds and index funds for equity investing.
Investors too need to recognise that while mutual fund SIPs offer great benefits, such as convenience, are easy on the wallet, instils the necessary investment discipline, make timing the market irrelevant, help mitigate the market volatility (i.e. rupee-cost average), and potentially compounds hard-earned money; the SIP contributions you make need to meaningful to beat inflation and help you meet your long-term financial goals.
[Read: Top 5 Mutual Funds for SIP]
Opting for Micro SIPs of say Rs 100 or Rs 250, will not necessarily serve you in accomplishing certain important financial goals, such as child’s education, wedding expense and your retirement. For that, you need to engage in prudent financial planning, follow a sensible asset allocation, and invest a meaningful sum of money in not just among the best mutual fund schemes but also the most suitable ones that align with your risk profile, investment objectives, the goals you are addressing, and the time in hand to achieve the envisioned financial goal/s.
Keep in mind that mutual funds, particularly the equity-oriented ones, are long-term investment products. So, when you take the SIP route, make sure your investment time horizon is longer.
[Read: Does it Make Sense to SIP in Debt Mutual Funds?]
Never commit the mistake of stopping or discontinuing your SIPs in worthy mutual fund schemes, as doing so may never help in achieving your envisioned financial goals.
Be a thoughtful investor.
If you find it challenging to choose the mutual fund scheme for your portfolio (or any other investment product for that matter), don’t hesitate to seek the help of SEBI-registered investment advisors who can guide you throughout your investment journey.
Happy Investing!
This article first appeared on PersonalFN here
