We Indians by birth have the gift of doing bargains but when it comes to investments we lose the grip. We sell at low and buy at high despite of 100 hours of training on the same. The SIP (Systematic Investment Plan) stoppage ratio in November 2024 reached 79.12%, representing a significant trend reversal in the mutual fund industry. The increase in SIP discontinuations to 39.14 lakh from 38.8 lakh in the previous month highlights rising investor caution amidst market volatility and external economic pressures.
Stoppage Ratio jumped to the third-highest level in history, with 39.14 lakh SIPs discontinued. The irony of the 2024 is that during Feb 2024 the decline in new registrations, saw a 10.3% decrease in SIP discontinuations, with 21.33 million accounts discontinued compared to 23.80 million in January. As a result, the ratio of SIPs stopped as a percentage of fresh SIPs registered (SIP stoppage or closure ratio) came in at 42.83% in February -- the slowest pace of rise since December 2021, from 46% in January.
The irony is that in 2024 same
year we found that in November 2024, the
SIP stoppage ratio climbed to 79.12%, marking the third-highest level
historically. In May 2024, the ratio peaked at 88.38%, indicating a steep drop
in investor confidence earlier in the year.
The general election results and their
impact created an opportunity but the data reveals we missed the opportunity
deliberately. Now when we get back to May 2020 which was during the
COVID-19 pandemic-induced market crash, the ratio was 80.69%, reflecting
financial distress and market uncertainty. The current stoppage ratio (79.12%)
is comparable to May 2020 (80.69%), a time marked by pandemic-related economic
disruptions. Unlike 2020, where financial distress was the primary driver, 2024
discontinuations seem influenced more by market sentiment and reallocation
preferences.
What makes the sip to be discontinued?
Most SIPs are non-goal-linked and
NFO-driven sales. Hence most of the SIPs can be called non-goal SIPs. Further, SIPs
also get stopped due to an evident trend of investor nervousness, with many
exiting SIPs during market corrections or when they perceive high valuations.
The data from November 2024 shows a consistent increase in stoppage ratios over
four consecutive months, with a notable decrease in new SIP registrations. It
has been found that a significant number of SIPs do not last long, with 40%
being discontinued within a year and 70% within three years. This points to a
lack of patience among investors, potentially missing out on long-term gains.
Further market volatility,
geopolitical tensions, and reactions to regulatory changes have been cited as
reasons for the high discontinuation rates. For example, the Lok Sabha
Elections in May and the US elections in November influenced investor behaviour,
leading to increased SIP stoppages.
Apart from Stoppages 49 lakh new
SIP accounts were registered in November, a sharp drop from 63.7 lakh in
October.
Conclusion
The high stoppage ratio is a setback for the industry, which relies heavily on retail participation for stable inflows. Fund houses may face liquidity challenges and pressure to adjust portfolios in response to redemption demands. The surge in the SIP stoppage ratio to 79.12% in November 2024 underscores significant investor caution amid challenging market conditions. While the industry faces short-term headwinds, this presents an opportunity to educate and engage retail investors on the benefits of staying invested. Fund houses and regulators must proactively address concerns and innovate to rebuild confidence, ensuring the sustained growth of the mutual fund ecosystem. In the coming 2025 we will get many opportunities in the market to create wealth but the biggest question is that retail investors will trust to buy when the knife is falling. The biggest challenge will be now that will 2025 beat the stoppage number of 2024. Another irony is that we don't get the data of Direct Plans SIP stoppage. Since that is a grey area where stoppage often happens due to a lack of advisory. We Indians have a habit of DIY in every subject before we face a huge loss.
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