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Number of New SIPs on the Rise

Data from CAMS indicates shift in business model of AMCs, distributors post entry load ban in mutual funds

The numerous changes effected by the Securities and Exchange Board of India (SEBI) -- the most important of them all being entry load ban -- it seems, have finally started showing their positive results on the mutual fund industry. Though the equity schemes of mutual funds continue to see net outflow, the number of SIPs (systematic investment plans) continue to grow ever since August 2009, when the entry load ban came into force.

According to data available with Computer Age Management Services (CAMS), a registrar and transfer agent (RTA), the number of new SIPs has been continuously increasing since August last year. In August 2009, the number of new SIPs was 91,576, a sharp drop from 159,369 in July the same year. However, from then onwards the number of SIPs has increased on an average 5 per cent every month except for a drop witnessed in March 2010.

In July 2010, the number new SIPs opened was 231,296 compared with 159,369 a year ago, a sharp jump of 45 per cent. Since the beginning of the current financial year up to July, a total of 781,349 new SIPs have been started.

CAMS is the largest RTA agent with close to 60 per cent market share.

SIPs allow one to invest in regular intervals – daily, monthly, quarterly, half-yearly – in mutual funds instead of investing a large amount at one go. This is an easier investments mode as the amount of investment is small. It also minimises the risk due to market volatility by averaging out losses.

Ever since the entry load ban and a curb on high upfront loads, fund houses as well as distributors have changed their business model. Now the focus is on long-term investment as it helps distributors earn a sustained trail commission, a yearly fee paid by fund houses to distributors as long as the investors remain invested in a particular fund. Though the trail fee is usually 0.50 per cent annually after the first year of investment, marketing head of a fund house told Value Research recently that they have completely done away with the upfront commission and increased the trail fee to 1.25 per cent. A number of fund companies have observed that investors are starting SIPs in larger numbers, and for greater amounts. The rate at which SIPs lapse is also now lower than it has historically been in similar phases of the stock markets. SIPs are a critical indicator of how investors will invest for the long term.

Recently, the Association of Mutual Funds in India (AMFI) clampdown on the practice of portfolio churning by distributors by announcing that in case an investor changes a distributor, the trail fee would go to neither the old distributor nor the new one. It was observed that after SEBI had done away with no-objection certificate for changing distributors in 2009, many distributors lured investors from other distributors and made them to exit certain funds and invest in others thus leading to high churnings. Meanwhile, outflows continue from equity schemes of mutual funds. In August, equity funds witnessed a net outflow of Rs 3,000 crore compared with Rs 3,400 crore in July. Ever since the entry load ban in August 2009, the mutual fund industry has witnessed net redemptions from equity funds barring three months – January, February and May 2010.

However, industry experts feel the net outflow was mainly on account of recovery of equity since the beginning of the second half of 2009, after the slump they witnessed in 2008. In 2008, equity markets dropped over 60 per cent from 21,000 to 8,000 level. The recovery gave investors an opportunity to book profit after being struck with their investments for two-three years.

On Monday, the BSE Sensex crossed 19,000 level while the Nifty breached 5,700 level.