Retail investors enter SIPs at high levels, stop at lows

Retail investors in mutual funds are known to chase returns, making large investments at market highs and staying away during its lows.

Systematic Investment Plans or SIPs were devised mainly to prevent this. However, data on SIP investments for 17 leading fund houses now show that investors follow the same practice for their SIP investments as well. They decide to start paying the monthly instalments on SIPs only after markets have rallied and stop them if the stock market is falling.

SIPs jump as Sensex rises

The number of new SIP accounts these funds added in the April-June 2010 quarter was over 50 per cent higher than the number added in the same quarter of 2009.

The number of SIPs added every month averaged 1.79 lakh accounts in the latest quarter, against 1.2 lakh accounts in the same period of 2009.

The Sensex ranged between 17,000 and 18,000 in April-June 2010, compared with 11,000-15,500 levels in April-June 2009.

Failed SIPs

The other disturbing trend is that of a good number of investors are discontinuing their SIPs mid-way. Even as funds added between one lakh and 1.9 lakh accounts each month over the last one year, the number of ‘failed' SIPs was quite large at 1.2-1.7 lakh accounts a month.

The instances of SIPs ‘failing' peaked during March, April and May 2009. In hindsight, that was the best time to invest in equity funds.

Stopping SIPs when market is down would defeat the purpose of cost averaging (buying more shares when prices are low and fewer shares when prices are high) that monthly investing is supposed to serve.

SIP collections rising

Overall, however, fund houses have seen a steady improvement in the new SIP accounts as the markets have climbed over the past year. Between 1.7 and 1.9 lakh SIPs have been added in recent months.

In all, the 17 mutual funds had about 25.6 lakh SIP accounts by end of June 2010.

Together, they managed SIP assets of Rs 20,600 crore.

In spite of improved market conditions compared to 2008-09, the average ticket size of new SIP accounts has not increased substantially. The national average has moved to Rs 2,190 from Rs 2,100 reported in 2008-09.

Source: http://www.thehindubusinessline.com/2010/08/09/stories/2010080952250100.htm