30th January 2012

Consider these facts

CAMS data (which probably accounts for 65% of industry volumes) on SIPs throws up these uncomfortable numbers :

1. Average monthly new SIP registrations have come down from over 250,000 to just around 130,000 over the last 6 months

2. SIP cancellations (not SIPs that were not renewed - we are talking about SIPs that have been actually cancelled mid-way) have shot up from around 50,000 per month at the beginning of 2011 to over 100,000 per month by the end of 2011

3. In December 2011, new SIP registrations - at around 130,000, were actually lower than total cancellations + expiry, which were around 140,000.

4. During this financial year so far, the SIP book (not including gold SIPs) has actually shrunk from 45.7 lakh live SIPs on 1st April 2011 to 45.2 lakh live SIPs by end Dec 2011. This despite 16.9 lakh new SIPs being registered during these 9 months.

5. While average SIP value of new SIP registrations has stagnated around Rs. 2000, the average of cancelled SIPs is sharply higher at above Rs. 3000

The SIP story - which was supposed to be the one bright spot for the MF industry - is suddenly not looking that good any more. The pot into which the industry hoped to accumulate assets, one SIP at a time - has sprung a leak which is large and worrisome. This pot is not accumulating any more - its leaking as much as the industry is collectively putting into it.

Is the SIP story crumbling? Why have cancellations doubled over the last 6 months? Why have new sales come down by almost 50% in these last 6 months? What needs to be done to plug this leak and resume the process of gradual accumulation? Is it just lacklustre SIP returns or is there more to it? We asked some of India's leading IFAs who have made a name for themselves in generating significant SIP volumes year after year. This is what they had to say :

Anindya Mandal, Ruby Financial, Kolkata

Fortunately for us, our SIP book is growing well this year - we have added over 2500 net new SIPs this year - I am hopeful that by March, we will close with 3000 SIPs more than we had last year. Our SIP book is growing primarily because we always link SIPs to goals and our SIP amounts are all small - between Rs. 1000 - 2000. In the industry, most of the SIP cancellations are the higher amount SIPs that were sold on 1 and 3 year return expectations. I know many investors whose banks held out a hope that in 1 year's time, their SIPs would have earned something more than their savings deposits. Now, after 1 year, when the returns haven't materialised, these investors are cancelling the SIPs which may have been booked for 5 years or even perpetual SIPs. If a SIP is sold on a 1 year return potential, it is bound to get cancelled. SIPs that are tied to life goals have a much better chance of being continued through bad cycles in the market.

Second aspect is the incentive structure that AMCs are putting out. When you give several years commissions as upfront with a clawback clause, many distributors get allured by this high "upfront commission" - which is nothing but their own money coming earlier. But this allure of high upfront makes distributors hard sell larger amounts of SIPs. When a client is putting in more than he is actually comfortable, he starts tracking it more regularly - and any disappointment leads to cancellations. When the commission clawback takes effect, the distributor then gets disillusioned and starts looking for alternative products. So, what have the AMCs achieved with this upfronting of future trail with a clawback?

Ashish Modani, SLA Investment Centre, Jaipur

Firstly, I must admit that the last two months have been bad for my business as well. But, from a broader context, I think the fundamental issue is that we have forgotten what a SIP is actually supposed to be. A SIP is supposed to be a vehicle of regular savings - just like a recurring deposit in a bank. But our whole industry has made it into a tool to invest into equity markets. Now, if you use a savings tool to invest in only one asset class, and that asset class does not perform, the tool gets blamed. Why are we not inculcating the habit of SIPs in our clients as regular savings vehicles - which can be invested into debt or hybrids or equity - based on risk appetite. SIPs have been sold all this while as a way to get good returns from the equity market. If returns are all that we as an industry have sold, we get disappointed customers when the return does not materialise.

The other aspect is the way SIPs are being vigourously pushed by AMCs. When you have AMC sales people who push distributors saying " Get a 2000 rupee SIP, you'll get Rs. 600", distributors in turn push SIPs aggressively with their clients. If clients then cancel their SIPs some time down the line because of poor short term performance, it's a double whammy for the distributor - he loses his client's confidence and he also sees a clawback of commissions. I know of a few distributors who have negative brokerage amounts in recent months because of the clawback. That in turn demoralises them even more.

Nikhil Naik, Naik Wealth, Mumbai

When SIPs are sold on a returns promise rather than as a solution, you will have these disappointments of cancellations. Let me give you a small example from our own office. A client who is a forex dealer in a bank was wondering whether to stop his SIPs when the market was going down. He told my RM that he thought it would be a better idea to invest when the market falls further. I asked my RM to go back into the premise on which this SIP was started. We found that this SIP was supposed to be for his daughter's marriage. I simply asked my RM to use the software facility we have, where these SIPs were given a name - ie, they were linked to his daughter's marriage goal. A couple of months of receiving these goal linked statements, and he never again talked about stopping the SIPs.

As long as we as an industry sell what sells and not what needs to be sold, we will keep inviting trouble for ourselves. Selling SIPs aggressively because of a better commission structure and because there is momentum, is what then causes these cancellations. If you sell SIPs as an integral part of a goal based solution, your experience will be better. I am not saying that poor returns over a 3 year SIP can be simply wished away - it is tough to explain weak returns over 3 and 5 years. Its just that clients' patience will be a lot more if their SIPs are goal oriented rather than returns focussed.

E. Chandrashekaran, ECS Consultants, Hyderabad

Our SIP book is presently around 4500 live SIPs with an average of around Rs.1700 per SIP. In good times, we used to average around 400 to even 500 SIPs per month - this has now come down to 200 - 250 SIPs per month. Cancellations are also increasing.

When we go to clients for SIP renewals, they are not willing to renew because even 3 year returns are below what they would have got in bank recurring deposits. Cancellations are happening for the same reason - clients are losing patience with poor returns. While they are not withdrawing the amount invested, they are preferring not to commit more money until they see some better returns on what they have already invested.

When we go for new client acquisition, we find that clients who do not have the baggage of underperformance - who are now starting their investments - believe that from here on, prospects of returns over a 3 to 5 year period are very good. But, if they refer to some friends and relatives for a second opinion, very often those relatives tend to dissuade them because of their own poor experience. So, new SIPs are actually coming more from new clients who are taking their own independent decisions. This naturally slows down new SIP momentum.

Hemant Rustagi, WiseInvest Advisors, Mumbai

Firstly, in our firm, we are running net positive this year as well in terms of growth of our SIP book. I think there are two main reasons for SIP cancellations in the industry :

1. When a distributor explains the SIP concept to a client and the client agrees to experiment it for a year, the moment the distributor gets the client to sign up for a 1 year SIP, half the battle is lost. If the premise when entering into a SIP was to test it out for a year, and the equity market does not do well in that 1 year test period, that's the end of the SIP.

2. You will see that there is a lot of shifting of SIPs from one fund to another, based on performance considerations. This adds up the numbers on both sides - cancellations as well as new SIPs

The main lessons that we need to learn is that for far too long, we have always believed long term to be 3 years. That definition does not hold good now - we must change our outlook. And, we must help clients see that a 3 year SIP is vastly different from a 3 year horizon on a lumpsum investment - in a 3 year SIP, the client's average holding period is only 18 months - whereas in a 3 year lumpsum transaction, his holding period is the full 3 years. We must encourage clients to go for long term SIPs - after all a 10 year SIP is actually a 5 year average holding period. If we get clients comfortable with long term SIPs, they will be more willing to bear these kinds of 2-3 year poor performance records. If you think about it from that context, each time you agree to a 1 year SIP, your client is actually having only a 6 month average holding period. All of us know its suicidal to look at equities with a 6 month outlook. We need to educate our clients about this, and sometimes, if necessary, walk away from 1 year SIPs if that's all the client wants to do. At least, you maintain your relationship with him rather than spoiling it with a 1 year SIP that satisfies nobody at the end of the day.

Siddharth Shah, Shalibhadra, Ahmedabad

We are also facing the same problems that the industry is facing. And to be honest, the problem with all of us in this industry is that we have been only selling mutual funds on performance. When performance does not happen, we face the consequences. Its as simple as that. Even today, this big rush to sell debt funds - its again only on the basis of an expected performance over the next 1 year. Now, if something happens on taxation of debt funds in this Budget, or if any of the assumptions in the debt market go wrong, we will again be red-faced. We have to get out of this performance selling habit - whether it is SIPs, debt funds or any other mutual fund product.

One way in which we are handling client objections on SIPs is we tell clients that when they invest in lumpsums, they are applying their mind, using our input, using advice from friends, brokers etc. They are controlling the timing of investment. But, when they choose SIPs, they are leaving it to nature - they are accepting that they do not want to exercise their judgement, but are happy to leave it to nature. If that's the case, let nature take its course - there will always be ups and downs, but eventually nature will give its reward for patience.

Delhi

Two of Delhi's leading advisors - both of whom score very high on the SIPs front, also shared their views - but requested that their names not be printed - for different reasons. Here are the views of the first advisor :

Touchwood, we are not facing any significant slowdown in our SIP volumes - we were averaging around 70-75 new SIPs totalling Rs. 4 - 5 lakhs per month. Now we are averaging around 60 - 70 new SIPs, averaging Rs. 3.5 - 4 lakhs per month. What I notice is that my experienced RMs are not facing any problems with maintaining their momentum - it is the newer RMs who lack that much confidence themselves and are therefore not able to perhaps give their clients the required confidence in these challenging times. We are not really seeing too many cancellations - in our firm, 2-3 cancellations a month is also a big deal and is looked at very closely.

From an industry perspective, the issue seems to be the old familiar one of chasing momentum. When sales heads attempt to drive momentum in a particular product by offering attractive commissions and deals, that's what creates excesses and excesses create cancellations. If you simply allow advisors to do their job and pick appropriate products for their clients, we won't have some of these problems. By throwing in these carrots to generate momentum, you land up creating more harm than good.

And these are the views of the other advisor :

Cancellations are increasing. Clients who had bought into long term plans are now coming back every 3 months with anxieties about the performance of their SIPs. This also puts a major strain on our bandwidth - because we had always planned for annual reviews and not quarterly reviews of long term financial plans. As clients anxiety increases, some of them prefer to cancel their equity SIPs. We are also seeing a trend that larger value SIPs are the ones that are getting cancelled. We are now also getting SIPs done in MIPs and in debt funds to ensure that the savings stream continues to come to us. SIPs for us no longer means only equity SIPs - it means ensuring that the client's savings comes to you in a product that is appropriate to his risk appetite.

What do you think?

Why do you think the SIP story is losing its lustre? Why are cancellations increasing so alarmingly? Is it basically a performance issue or is mis-selling of SIPs also partly responsible for these cancellations? What are some of the lessons we must learn from this turn of events in SIPs? What should we do to rebuild client confidence in SIPs as a savings vehicle? Share your thoughts and experiences with advisors around the country - just as some of these SIP champions have. Post your comments in the box below - its YOUR forum !