What SIPs Tell Us About the Stock Market - Vivek Kaul's Diary
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What SIPs Tell Us About the Stock Market

Nov 13, 2018

Vivek Kaul

Professional money managers are always bullish. They will keep telling you all is well and cite various data to prove their point. If you make money out of people investing money with you, how can you not be positive at all points of time?

The latest data point that has caught their fancy and they have been using it to buttress their point, is the total amount of money coming into mutual funds through the systematic investment plan (SIP) route, every month. SIPs, basically allow an investor to make a fixed investment into a mutual fund at regular intervals (let's say a month) instead of making a lump-sum investment.

Take a look at Figure 1, which basically plots the total amount of money coming into mutual funds through the SIP route, over the years.

Figure 1: SIPs Have Risen Over the Years

Figure 1 is an upward sloping curve. It clearly tells us that between April 2016 and October 2018, investments through the SIP route have largely gone up month on month, notwithstanding an odd drop here and there. In October 2018, they stood at an all-time high of Rs 7,985 crore.

The point being that if the SIP investor, who is basically a retail investor, continues to invest more and more money into the stock market every month, the stock market must be in a very strong position. And hence, the naysayers don't make much sense. This is the point of view being offered by more than a few professional money managers in the recent past.

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The data has also been used to conclude that the Indian retail investor has matured because every month he invests more money in mutual funds through the SIP route than he had done in the past.

The problem is that if we go a little deeper, this logic makes no sense. World over, and time and again, the higher the stock market goes, the more money the retail investors invest in the stock market.

Also, it is important to remember another point here. The extra money that came into SIPs in the month of October 2018, was committed during the month of September 2018. It takes one month to process an SIP application and get it going.

Hence, an investor who started an SIP in October 2018, did so looking at the state of the stock market in September 2018.

Let's take a look at Figure 2, which basically plots the highest level achieved by the BSE Sensex during the course of a particular month, over the last few years. This is plotted on the y-axis on the right-hand side.

Figure 2 also includes Figure 1, i.e., the money flowing into mutual funds through the SIP route. This is plotted on the y-axis on the left-hand side. Figure 2 is slightly complicated to read. Normally, I avoid using charts with three axes, but in this case, I really had no choice.

Figure 2: SIPs and Sensex Go Hand in Hand

What does Figure 2 tell us? It tells us very clearly that inflows into mutual funds and the highest levels achieved by the BSE Sensex, go hand in hand. The higher the Sensex has gone more money has come into mutual funds through the SIP route.

Of course, there is an odd variation here and there. But there is a clear upward trend to Figure 2. As stock markets have risen more and more money has come into mutual funds through the SIP route.

Now professional money managers want us to believe that since SIP inflows continue to remain strong, the Indian retail investor has matured and there is nothing wrong with the stock market.

Nevertheless, as Figure 2 clearly shows, the Indian retail investor is simply following the stock market going up. In August and September 2018, the highest level reached by the BSE Sensex was 38,990 points and 38,934 points, respectively. The SIP inflows in September and October 2018 were at Rs 7,727 crore and Rs 7,985 crore, respectively.

This bull market is yet to see a big dip of more than 20%. If that happens and the retail investors continue to invest Rs 7,000-8,000 crore into mutual funds, through the SIP route, as they are doing currently, then we will know for sure that the Indian retail investor has matured. Up until now, this hasn't happened.

Alternatively, if the stock market falls continuously for a period of six months or more and the inflows through the SIP route still remain strong, can we conclude that the retail investor has matured and is also buying when the stock market is falling.

Buying when the stock market is falling is the most important part of any SIP or regular investment because it brings averaging into the picture and pushes down the overall cost of buying either mutual fund units or stocks for that matter.

This is something that spruces up returns in the longer-term. A simple point to understand, but psychologically very difficult to execute.


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

PS: Over the weekend, I will be a part of two discussions at the Tata Literature Live: The Mumbai Litfest 2018.

The first session is titled Jobs at Hand. Regular readers would know that I have written extensively on this topic. Here are the details. It's scheduled at the St. Paul's auditorium in Bandra, which is located above the Title Waves Bookstore and right opposite the Duruelo Convent High School.

The second session is titled Cash Counter: How Safe is Your Money. It is scheduled at the NCPA-Tata Theatre in Nariman Point. Here are the details.

Entry is free, but on a first come first serve basis. You can register here.

Hope to see you at both the venues.

PPS: Now you can follow Vivek Kaul on Social Media and get Vivek's updates on the critical issues affecting the economy and your wallet... as they happen. Follow Vivek on FacebookTwitter, and Google+.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "What SIPs Tell Us About the Stock Market"

Vipul Jasani

Nov 13, 2018

Another piece of excellent analysis by Vivek. Superb as usual.

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