Are SIP inflows determined by market returns?

Mutual fund investors in India continued to keep faith on Indian equity market and poured in Rs. 14,683 crore into equity funds in the month of February 2018. There was an increase of Rs. 1,279 crore, month on month basis. This is even though stock market indices witnessed a sharp volatility in the month of February 2018 and ultimately fell by 5.2 per cent. This is the largest monthly fall witnessed by a market in the last 24 months.

Although the overall equity inflows increased in the month of February, the sticky inflows through SIP declined in the month of February. It is the first time since April 2017 that we witness a month on month decline in inflows through SIP. Is it the case that as stock indices fall, inflows too will follow the suit?

The empirical and statistical analysis shows that there is no direct correlation between monthly SIP inflows and stock indices return. Even if we assume that it will take time for someone to stop his SIP, one-month lag inflows should decline. However, the data does not point to any such conclusion. For example, the last major fall witnessed by market was in the month of November 2016, when the market fell by 4.7%, however, in the same month SIP inflows increased by Rs. 450 crore on a monthly basis. Even in the next month, there was no major fall in the inflows. Statistically too there is no significant relation between SIP inflows and market returns.

One of the reasons why we have witnessed a fall in the SIP is because of re-introduction of long-term capital gain (LTCG) in the latest budget. This has created a confusion among investor and hence they might be booking profits and staying away from the market till the dust settles down. Nevertheless, we believe one should not stop SIP at the current juncture, especially if someone has a long term investment horizon.