'Starting an SIP now and continuing with it is likely to translate into high returns over the long term.'
The mutual fund industry witnessed significant decline in new investor addition in 2022-2023.
A mere 4.02 million ventured in, marking a 62.5 per cent decline, compared to the robust influx of 10.9 million entrants in 2021-22.
The industry has also experienced an uptick in halted systematic investment plans (SIPs) in recent months.
While the average number of discontinued SIPs per month for the whole of FY23 stood at 1.19 million, the period between December 2022 and March 2023 saw cancellations ranging between 1.35 million and 1.54 million.
Poor returns deter investors
Poor returns from the equity market over the past 19 months is the primary reason for fewer investors entering MFs.
"Returns from several segments of the equity market have been close to zero. This has affected investor behaviour," says Vaibhav Porwal, co-founder, dezerv.
Meanwhile, fixed-income returns have risen.
"Investors looking for predictable returns would have moved to small-savings instruments offering assured returns of 7-8 per cent," says Nirav Karkera, head-research, Fisdom.
Fixed deposit returns, too, have shot up.
Inflation, higher EMIs taking a toll
Besides poor equity returns, high inflation and interest rates have led to more SIPs being stopped.
"High inflation since December 2020 has led to increased cost of living. Tightening household budgets have caused many investors to stop their SIPs," says Gopal Kavalireddi, head-research, FYERS.
Home loans linked to external benchmarks -- mostly the repo rate -- have risen by around 250 basis points since May 2022, leading to a sharp increase in equated monthly instalments (EMIs).
"With a larger portion of household savings going into paying EMIs, there is less money for SIPs," says Porwal.
Plan your entry
The best time to invest in equities is when the asset class is underperforming.
"When past returns are looking poor, there is an opportunity to purchase equity fund units at a discount. Starting an SIP now and continuing with it is likely to translate into high returns over the long term," says Misbah Baxamusa, Chief Executive Officer, NJ IndiaInvest.
Valuations are reasonable currently.
"The Nifty is trading at around 18.5x the forward earnings of 2023-2024. Small and mid-caps have underperformed the Nifty over the past few years and are ripe for an upward move," says Kavalireddi.
Indian equity outlook remains positive.
"Our macroeconomic fundamentals remain strong. Earnings are expected to spike from FY24 through 2024-2025 onwards. With foreign portfolio investors staying out of Indian equities, retail investors can acquire them at reasonable valuations," says Karkera.
New investors should make a planned entry into equities.
"Build a diversified portfolio with equities, debt, and gold. Decide on your allocation to each of these asset classes first. Consider international diversification," says Karkera.
Baxamusa suggests diversifying across market capitalisations -- small-, mid-, and large-cap.
"Also diversify across styles -- growth, value, etc -- and between active and rule-based funds," he says.
Build an equity-heavy portfolio if you have an investment horizon of at least seven years.
Invest more in equities to rebalance
The principle of asset allocation dictates that existing investors should allocate more to equities.
"If underperformance has resulted in your portfolio becoming underweight on equities, allocate more to it," says Porwal.
Kavalireddi says it is okay to stop your SIPs when your financial goal has been achieved, the fund you have invested in has been a consistent underperformer, the fund manager has changed (and the new fund manager's style doesn't suit your portfolio), or to rebalance your portfolio.
"But don't stop your SIP due to a temporary decline in the equity market or due to a temporary dip in fund performance," he says.
