sips-may-be-hit-by-franklin-templetons-move

Context: In 2019-20, a little more than ₹1 trillion was invested into mutual funds through the SIP route. 

More about the news: 

  • Mutual Funds are once again in news in India, though, for the bad reasons.
  • Recently, Franklin Templeton, the ninth largest Mutual Fund in the country, has shocked investors with its decision to wind up six yield-oriented, managed credit funds from India.

About SIP

  1. A Systematic Investment Plan (SIP) is a facility offered by mutual funds to the investors to invest in a disciplined manner.
  2. SIP facility allows an investor to invest a fixed amount of money at predefined intervals in the selected mutual fund scheme. 
  3. The fixed amount of money can be as low as Rs. 500, while the pre-defined SIP intervals can be on a weekly/monthly/quarterly/semi-annually or annual basis. 
  4. By taking the SIP route to investments, the investor invests in a time-bound manner without worrying about the market dynamics and stands to benefit in the long-term due to average costing and power of compounding.
  5. A bulk of SIPs are run on equity mutual fund schemes, where the money invested is eventually put into stocks. 
  6. Hence, SIPs are a regular and indirect form of buying stocks

Benefits of SIP Investing: Power of Compounding

  • Compounding effect ensures that you earn returns not only on your principal amount (actual investment) but also on the gains on the principal amount i.e. your money grows over time as the money you invest earns returns. And the returns also earn returns.

Stocks are an investment in a company and that company's profits.

  • A company might use money raised from a stock offering to fund new products or product lines, to invest in growth, to expand their operations or to pay off debt.
  • Companies typically begin to issue shares in their stock through a process called an initial public offering, or IPO.

Benefits: Investors buy stock to earn a return on their investment. The return generally comes in two ways:

  1. When the stock’s price goes up, one can then sell the stock for a profit.
  2. Most investors own common stock which comes with voting rights, and may pay investors dividends.

Significance of SIP investors : While foreign institutional investors (FIIs) are on a selling spree in Indian equity market as fears over a likely coronavirus pandemic, domestic investors have maintained a steady flow of SIP (systematic investment plan) money has encouraged them to continue buying stocks.

  • In 2015-16, the price to earnings ratio of the 30 stocks that make up the BSE Sensex was 20.2. In 2019-20, this jumped to 26.4. 
  • Price to earnings ratio is obtained by dividing the current stock price of the company by its earnings per share over the last 12 months. 
  • Right through 2019-20, more than ₹8,000 crore was invested every month in mutual fund schemes through the SIP route. A bulk of this would have gone into equity mutual funds and, hence, stocks. 
  1. In comparison, FIIs bought stocks worth just ₹87,403 crore during the same period. 
  2. During the last three years, it is the money coming into stocks through the retail SIP route that has driven up the stock market, despite the slow growth in company earnings.

Foreign institutional investors (FIIs) are those institutional investors which invest in the assets belonging to a different country other than that where these organizations are based.

  • These are the big companies such as investment banks, mutual funds etc, who invest considerable amounts of money in the Indian markets. 
  • With the buying of securities by these big players, markets trend to move upward and vice-versa. They exert strong influence on the total inflows coming into the economy.
  • Market regulator SEBI has over 1450 foreign institutional investors registered with it.

Effect of market crash & Franklin Templeton on SIPs: BSE Sensex crashed nearly 3,000 points in 11 sessions between February 12 and 28 due to the coronavirus lockdown.

  • The question is whether these investors will continue to indirectly invest in stocks. By March, the SIP investment had collapsed to ₹2.4 trillion because of a massive fall in stock prices in February and March.
  • It takes a month to close an SIP account. Hence, the real picture on this front will start to emerge once the April-end data is released. 

The stock market fall and the spillover effects of Franklin Templeton winding down six debt fund schemes would have definitely made the SIP investor jittery.

Mutual Funds

A mutual fund is a pool of money managed by a professional Fund Manager.Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

  • It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. 
  • And the gains generated from this collective investment is distributed proportionately amongst the investors after deduction of applicable expenses and levies, by calculating a scheme’s Net Asset Value or NAV. 

Net Asset Value

  • The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day. 
  • NAV per Unit represents the market value of all the Units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.

Source: amfiIndia

What is the difference between Top- up SIP and SIP?

  • Top up SIP is a facility in which an investor can increase the amount of SIP instalments by a fixed amount at predetermined intervals whereas SIP is a facility in which a fixed amount is invested at predetermined intervals.

Source: https://www.sbimf.com/en-us/sip/what-is-sip

Source: https://www.livemint.com/money/personal-finance/sips-kept-market-buoyed-but-that-may-not-last-now-11588010387001.html