Average monthly SIP inflows in FY18 so far has been ₹ 4636 crore, up 27 percent over the monthly average of ₹ 3626 crore last year, according to data collated by the Association of Mutual Funds.
Inflows into equity schemes of mutual funds through systematic investment plans (SIPs) have been steadily on the rise, much to the delight of fund managers, and the sales teams at asset management companies.
Average monthly SIP inflows so far in FY18 has been ₹ 4,636 crore, up 27 percent over the monthly average of ₹ 3,626 crore last year, according to data collated by the Association of Mutual Funds.
That makes life a lot easier for fund managers, who are able to plan their allocations better.
In the past, retail investors would rush to put money in a raging bull market and then withdraw it as the market began to slide. That meant fund managers would often have to bet on shares of risky companies near the market top and then have to sell quality stocks in a downtrend because the rest would not have any takers.
"SIP flows are really good for us (fund managers); it helps us to calibrate money better," said Gopal Agrawal, Chief Investment Officer-Equities, Tata Mutual Fund. He added that SIP route is the best option for investors currently when valuations look stretched.
Agrees Gautam Sinha Roy, Senior Vice President and Equity Fund Manager at Motilal Oswal Mutual Fund. "Visibility on inflows helps fund managers take long term calls, and that translates into performance at some point."
Equity benchmarks have risen roughly 20 percent so far this year, defying sluggish macroeconomic data, geopolitical tensions, foreign fund outflows and expensive valuations. Assets managed by pure equity schemes now stand at ₹ 5.73 lakh crore, accounting for roughly 28 percent of total mutual fund assets.
The bull market is not showing any signs of cooling off yet. And that appears to be drawing in retail investors by the droves, if the numbers are any indication.
Close to ₹ 5,000 crore of SIP money flowed into equity schemes in July this year, up from around ₹ 4,100 crore in January.
All asset management companies together have about 1.52 crore SIP accounts through which investors regularly invest in mutual fund schemes.
Last year, about 6.26 lakh SIP accounts were added each month on average, with an average SIP size of about ₹ 3,200 per account.
In FY18 so far, the industry added about 8.23 lakh accounts each month, even as the average account size has not changed much.
"Many investors who had burnt their fingers in the last rally by directly investing in equities without proper research are now taking mutual fund route." Tushar Bopche, Vice President, Products, IIFL.
Falling returns from traditional investment avenues like fixed deposits, real estate and gold is one of the main reasons for the massive inflows into mutual funds. An equally important driver has been demonetisation. Strong inflows have triggered a virtuous cycle wherein rising stock prices are attracting more money.
From playing second fiddle to foreign funds till some time back, mutual funds now have transformed into a credible counterweight to overseas money managers. This was evident in August when close to ₹ 15,000 crore of net selling by foreign funds did not have much of an impact, thanks to purchases by domestic mutual funds.
And yet, some fund managers are hoping that the industry does not become a victim of its own success.
"There are instances of balanced funds being sold as quasi-fixed income products," said a fund manager who did not want to be quoted. "Given the booming market and stellar performance of most funds, there are plenty of takers. But the industry should learn from the experience of insurance (industry) before misselling the product," the fund manager said.
In 2009-10, domestic insurance firms collected huge sums by selling Unit Linked Investment Plans (ULIPs) to customers without giving a true picture of the product.
ULIPs collected fat commissions upfront, which in turn depressed the returns for the buyers of the product. Later, IRDA stepped in and changed the commission structure so that the holders of the product were not shortchanged, but the damage had already been done. For many years even as the rules were changed, insurance firms had a tough time selling ULIPs.
And there is a word of caution for investors in mutual funds as well.
"Equity markets are inherently volatile, a stock index will never move in one direction, so investors need to be ready for volatility," said Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund.
Fund managers also cannot take regular inflows for granted. During the bull market of 2007-08, retail investors invested heavily into mutual funds. SIPs were just beginning to gain popularity at that time as the market had been rising for nearly five years in a row. But the moment share prices went into a tail spin in the aftermath of the global financial crisis, mutual fund investors panicked. Many investors did not renew their SIPs after seeing their returns shrink considerably.
"Inflows are strong right now, but one can never say how investors will react if the market underperforms for two or three years at a stretch," says Rajeev Thakkar, CIO, PPFAS Mutual Fund.
Traditionally, retail investor frenzy has marked the peak of a bull run. That trend no longer seems to hold true, looking at the sustained uptrend in stock prices even as retail money has been gushing in through mutual funds.
But not everybody is convinced.
"Where was this retail money when the market was cheap," says a fund manager who did not want to be quoted.
"The inflows are rising as the market is climbing. Valuations are already expensive, but since the trailing returns look great, everybody seems to be convinced that the future returns will be as good. Most people are not aware about the product they are buying into. This is a classic sign of an approaching market peak. But that may not happen tomorrow or the next month. You could even see monthly SIP inflows climbing to around ₹ 8000 crore per month before realization sets in that stock prices are hopelessly inflated," the fund manager said.
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