Mutual funds: Limiting inflows enables fund manager to stick to quality

WhiteOak Capital Mutual Fund’s new fund offer (NFO)—Whiteoak Capital Mid-cap Fund—has an interesting feature. The fund house has said it will accept money into the fund only via the systematic investment plan (SIP) route after the NFO closes.

“This is perhaps the first time a fund house has chosen to restrict fund inflows into a scheme only through the SIP route from the very beginning. There are other funds that have done so earlier. But they had done it as a course correction measure, in response to market conditions,” says Arun Kumar, head of research, FundsIndia.

Controlling inflows

Mirae Asset Emerging Bluechip Fund also restricts investments to a monthly SIP of Rs 2,500 per permanent account number (PAN).

SBI Small Cap Fund has capped the monthly intake through SIP at Rs 25,000 only.

DSP Small-Cap Fund had stopped inflows altogether in February 2017, then reopened it via the SIP/STP route in September 2018, and finally began accepting lump sum investments in March 2020.

Franklin Templeton AMC had announced it would accept money in its international funds through existing SIP, STP and transfer of IDCW (income distribution cum capital withdrawal) only.

According to experts, fund houses impose such restrictions to control inflows. “This helps the to choose stocks based on quality instead of cash availability,” says S Sridharan, founder & principal officer, Wealth Ladder Direct.

Fund houses are often accused of indulging in indiscriminate AUM gathering. Stopping or limiting inflows into a fund is an investor-friendly measure. When a category is red hot, and past returns appear strong, a flood of new money pours into the best-performing funds. In a segment like small-cap, the number of quality stocks (with adequate liquidity) tends to be limited. An excess of inflows also forces the to deploy money at high valuations. Doing so can affect future performance negatively.

Growing SIP cult

SIP, essentially an arrangement for investing at regular intervals, has emerged as the preferred mode of investing by retail investors in equity . According to the Association of in India (AMFI), investments through the SIP book stood at Rs 12,140 crore in July.

In recent years, fund houses have promoted SIP investing vigorously. Financial planners, too, encourage their clients to stagger their investments.

Inculcates discipline

The SIP route suits retail investors, especially the salaried class, by matching their income flows with investment frequency.

Investing via SIPs also enables investors to ride through market highs and lows. Since SIPs are started for a fixed period of time, the large majority lets them continue even when are down (as was witnessed in the latest October to June correction). Purchase of units at low valuations provides a kicker to long-term returns.

This disciplined approach reduces timing risk. This is especially true in the case of the more volatile small- and mid-cap funds. Investors who invest in lump sum tend to do so when these categories are doing well (at high valuations). And they get scared into not investing when these categories are in the doldrums, producing suboptimal returns.

What should you do?

Don’t compare lump sum returns for a certain period with SIP returns and try to arrive at a conclusion regarding which approach is better. If at the start of the period (for which you are making the comparison), the were at a low, and they are at a high at the end of that period, returns from the lump-sum method are likely to look better.

The gain from SIP investing is primarily behavioural. A regular SIP doesn’t pinch. Investors also don’t get affected by market conditions and are gradually able to build a large corpus.

Fund houses may not restrict inflows in all equity schemes to the SIP mode only. “Restricting inflows through SIPs is a fund house call. Investors have the option to invest both via SIP and lump-sum in most schemes,” says Kumar.

They should use the SIP mode for long-term wealth building. They may, in addition, invest via the lump-sum mode when the are down, to provide a tactical boost to their portfolios.

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