What’s Driving SIP Investing In India?

Kotak Insights | Date 19/01/2024

Picture this - Indian share markets are ablaze with a frenzy of investors, all armed with a powerful weapon.

No, it’s not the power that helps you avoid losses or any superficial prowess that helps you get all the insider stock tips in advance. Instead, the weapon is a small yet super effective strategy that allows you to earn a minimum guaranteed return even if all hell breaks loose - Systematic Investment Plan (SIP).

Whether a bear market or a bull market, SIPs have emerged as a valuable option for savvy investors. SIP is a long-term investment strategy involving investing a fixed amount of money regularly.

This approach provides a cushion against market volatility. It becomes challenging to remain invested during market volatility and corrections. Fear often leads investors to panic and sell stocks. But if you take the SIP route, you’re not trying to time the market; instead, invest for the long term.

The benefits don’t end there. When you go the SIP way, you can increase, decrease, or pause investments. Meanwhile, the power of compounding over time is visible as the investor continues to invest regularly. The returns generated from the initial investment are reinvested, leading to higher returns over time.

No wonder SIPs have been gaining popularity among Indian investors.

Here is some data that proves the rising SIP adoption in India - The total SIP inflow in the calendar year 2023 stood at Rs 1,83,741 crore after December witnessed an SIP inflow to the tune of Rs 17,610 crore.

As compared to this, in the calendar year 2022, the corresponding figure stood at Rs 1,49,437, thus indicating an increase of 23% in 2023 over 2022.

It is vital to note that December 2023 saw the highest ever level of SIPs. Now the SIP AUM (assets under management) stands at Rs 9,95,925 crore as compared to Rs 9,31,333 crore for November 2023.

Moreover, for mutual funds, retail mutual fund folios (i.e. Equity + Hybrid + Solution Oriented Schemes) hit at an all-time high of 13,18,55,261 for the month of December 2023 as compared to 12,92,21,994 in November 2023.

Never before have we seen this level of enthusiasm and bullishness from retail investors.

From the above data, it’s clear that domestic investors are warming up to the concept of mutual funds and investing aggressively in them. The liquidity pouring through SIPs is relatively stable, reliable, and long-term.

Select stocks like Computer Age Management Services (CAMS) have also gained popularity as retail investors chase equity exposure through mutual fund SIPs.

Now, there are a couple of reasons behind India’s SIP rush.

First, the disciplined approach that investors have been following has worked wonders. If you want to play the India growth story, go the SIP way. That’s the mindset even youngsters are setting these days.

Senior citizens and regular investors were undoubtedly following some SIPs – a stock SIP or a mutual fund SIP. But now, even youngsters and ‘so-called millennials’ have joined the bandwagon. Since there’s no minimum investment requirement and you can start with as little as Rs 500, youngsters have found this avenue attractive.

This ‘affordable’ factor comes into play here. And since everything’s online with almost zero paperwork, many investors, especially the youth, are investing in SIPs online.

If one sticks to SIPs in both good and bad, we’re pretty confident it could be the best investment strategy.

You cannot stop your SIPs in a falling market and expect to earn good returns over the long term. SIPs must be persisted irrespective of what the broader market is doing.

The second reason behind the SIP rush is the rupee cost averaging. SIPs have facilitated channelizing domestic household savings into equity markets. This has provided investors with the benefit of rupee-cost averaging.

In the case of rupee cost averaging, you buy fewer stocks when the market is high, and when the market is low, you buy more stocks. This way, the cost of buying stocks is averaged over the long term, reducing the impact of market volatility on the portfolio's overall performance. This is known as rupee cost averaging.

The other reasons why SIPs have found favour are India’s rising income level and standard of living.

We wrote about how premiumization is changing Indian consumers. As people’s standard of living improves as a result of more disposable income, Indians would like to be prepared if there’s any crisis financial-wise. So, much of their disposable income could be set aside towards SIPs.

Does it make sense to take the SIP route when markets peak?

That is the question bugging investors these days. Sure, they’re not worried about taking the SIP route, but there’s a sense of curiosity about what might happen when someone takes the SIP route in a bull market.

It shouldn’t matter. And we have data points to make our case.

SIPs provide the freedom from timing the market, instead helping investors focus on remaining invested to compound their hard-earned money.

Consider a systematic investment plan of Rs 1,000 monthly into the S&P 500 index between January 2012 and February 2021. The investor starts on January 1, 2012, or the first few months of 2012 and ends on February 28, 2021.

January 1, 2012, marked the beginning of a bull market as the S&P 500 had steadily recovered from the financial crisis of 2008. Conversely, February 28, 2021, can be considered a bear market bottom because the market experienced a sharp decline due to the COVID-19 pandemic.

So, how did this investment perform?

During this period, the investor would have earned an annual return of 9.5%. Considering dividends, the returns climb to around 11%.

However, let's explore the potential impact of market timing:

If the investor had started the investment journey at the bull market's peak on January 1, 2012, and panicked during the market crash in February 2021, he would have achieved a lower return. If he exited the market during the bottom, the annual return would have been around 8.2% without considering dividends.

This shows that the investor achieved a decent return even with imperfect market timing. It highlights the importance of staying invested long-term and not trying to time the market, as the potential gains from holding on during market recoveries can be significant.

It will show similar results when considering the Indian benchmark, Sensex, instead of the S&P 500 index. Here, you’ll have to take the starting date as December 2010 because Sensex was at its peak, and the end date could be the same.

By the end of March 2020, if you followed the SIP investing strategy and put Rs 1,000 monthly into Sensex, you would have earned an annual return of 6.6%.

If you had stayed invested for 15 more months and persisted with the same amount, your returns would have climbed to an impressive 15%.

It’s all about long-term investing and sticking to your goals through thick and thin.

Next time someone questions you about investing in SIPs at the current market highs, you know what to say. Sticking with it through markets ups and downs will be the X factor that works wonders for your portfolio.

See you with another interesting market story next week.

Until then - Happy learning!

Sources: Kotak Securities, Economic Times, Livemint, SEBI

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here