February effect pulls down SIP flows slightly to Rs13,686 crore

However, the overall SIP flows in FY23 in the first 11 months are already at Rs141,696 crore with one more month yet to go. The 11-month SIP collection figure for FY23 is already higher than the SIP flows achieved in any of the previous years. In fact, if you consider the extrapolated full-year SIP flows at Rs154,578 crore for FY23, the SIP flows are estimated to be higher by 24.1% compared to FY22 and 60.9% higher compared to FY21. But first let us understand what is the February effect all about?

February effect and the impact on SIP flows

The classic February effect is about fewer number of days in the month (only 28 days), which logically leads to lower SIP collections. The table below captures the SIP inflows at a gross level between February 2022 and February 2023.

Data Source: AMFI

Continuing the February effect, this has been a standard feature. If you look at the last 7 financial years, the February SIP collections have been lower than the January collections in 6 out of these 7 years. In terms of yoy SIP collection growth; between February 2022 and February 2023, the SIP flows have grown by 19.7% from Rs11,438 crore to Rs13,686 crore. This has also been matched by a concomitant rise in SIP folios as we shall see later. But first a quick detour into whether ELSS SIPs are at risk of tapering and why it is a problem?

Quick detour: Will the New Tax Regime (NTR) derail ELSS SIP flows?

One of the concerns that has been expressed in the aftermath of the new tax regime (NTR) is that it may dissuade ELSS SIPs. In India, young people prefer ELSS SIPs to save tax, but with the NTR becoming default from FY24, there may not be much of an incentive for investors to commit monies to ELSS Funds. Here are 3 points to know.

1. The impact would surely be there and for the simple reason that among all the equity fund categories, ELSS funds have the highest number of folios. At 149.68 lakhs, ELSS funds have more investor folios than any other category and this is going to be hit by the new tax regime. The impact is already visible in yoy growth in February 2023.

    

2. However, the problems with ELSS have been two-fold. Despite the lock-in, they never really outperformed equity indices. Also, since the time the long-term capital gains on equity funds was reintroduced in 2018, there has been waning interest in ELSS as a tax saving instrument.

    

3. On the positive side, this would impel investors to take a more financial planning approach to investing rather than be driven by tax savings. The NTR is likely to divorce the financial planning aspect from the tax planning aspect. In the long run, that is the way it should be.

So, while the impact of the NTR would be there on ELSS folios, it should be more a transfer of folios than a fall in folios. Hence, the net impact should be minimal.

Annual SIP flows and the average monthly ticket size

At Rs141,696 crore, FY23 is already the biggest year in SIP collections with 1 more month to go. If we look at the underlying trend, SIPs have been consistently growing, except for a brief lull in FY21 due to the pandemic. The figure for FY23 is annualized (in the table below), but with 11 months elapsed, it is reflective of the final picture of FY23. 

Data Source: AMFI (* FY23 data is annualized)

While the SIP flows are more straight forward, another interesting metrics to evaluate the SIP intensity is the average monthly SIP ticket (AMST); which is captured in the table above in the third column. This has been steadily increasing over the last 6 years, as illustrated in the table. So, what is the big takeaway from the SIP flows and the AMST data?

The big takeaway is that the recovery post COVID has been strong and decisive even as it has been unrelenting. Despite a plethora of headwinds like inflation, central bank hawkishness and fears of recession; SIP flows have been building traction in FY23. That can be largely attributed to the surge in millennial participation with a strong equity bias.

SIP folios, SIP AUM and the retail story for February 2023

SIP flows in value terms can be enticing, but it can be misleading too. SIP flows do not capture retail intensity as well as the growth in SIP folios do. In fact, SIP folios and SIP AUM are proxies for assessing retail spread, although SIP folios (MF accounts unique to an AMC) are more reliable.

How did the SIP folio story pan out in February 2023? The number of SIP folios increased from 621.63 lakhs in January 2023 to 628.26 lakhs in February 2023. That is monthly net accretion of 6.63 lakh SIP folios or 1.07%. While the gross SIP growth has been robust, the net impact is tepid due to a much higher proportion of SIP closures.

What about SIP AUMs? Between April 2022 and February 2023, SIP AUM increased from Rs578,086 crore to Rs674,415 crore; a growth of 16.66%. Despite solid folio growth, the SIP AUM has been consistently falling since November 2022. This can be attributed to the sharp fall in equity indices in the last 3 months, which has offset the SIP inflows. 

SIP stoppage ratio remains the challenge even in February 2023

SIP stoppage ratio is the ratio of SIP accounts discontinued to the new SIP accounts opened. It shows the stickiness or SIP retention. Lower this ratio, the better it is since it indicates that the fewer SIPs are either being discontinued or not being renewed. For FY20, the SIP stoppage ratio was 57.84% while for FY21 it was 60.88%. 

There was a reason for a high SIP stoppage ratio, back then. SIP stoppages in FY20 and FY21 were driven by COVID uncertainty and withdrawals for cash flow emergencies. Later in FY22 the SIP stoppage ratio fell to 41.74%. Ideally, SIP stoppage ratio in the range of 40% to 45% is considered to be tolerable and also acceptable. In FY23 SIP stoppage ratio for the month of January 2023 stood at 59.38%, but in February it SIP stoppage ratio surged to 67.9%.

That is high considering the last year data, but the uncertainty and headwinds are also higher in the current year. The immediate priority should be to bring down the SIP stoppage ratio closer to 50% by the end of March 2023, although it does sound ambitious. However, the real story of SIPs may have just scratched the surface in India. For an economy with $3.4 trillion of GDP and poised for $5 trillion by year 2020, these SIP numbers are just the tip of the iceberg and belie the true SIP potential that India has. That would be the subject matter of another discussion altogether.