Amid ongoing market volatility and a 6% decline in benchmark indices in February, mutual fund monthly SIP inflows witnessed only a marginal 2% drop. Market experts believe that SIP numbers have remained strong and encouraging. The slight decline in February is attributed to the shorter duration of the month, and otherwise, the numbers would have been on par with January.
Anand Vardarajan, Chief Business Officer at Tata Asset Management, stated that while there was a minor drop in SIP inflows, it was primarily due to fewer days in the month. Another expert, Suranjana Borthakur, Head of Distribution & Strategic Alliances at Mirae Asset Investment Managers (India), echoed a similar view, emphasizing that the drop was not significant and urging investors to continue their SIP contributions as it remains a great time to accumulate units.
Expert Warnings on SIP Risks in Expensive Stocks
A report by ET highlighted concerns raised by S Naren, CIO of ICICI Prudential Mutual Fund, regarding the risks of investing in expensive stocks through SIPs. Speaking at a mutual fund distributor event, Naren warned that investing in the wrong product at the wrong time through SIPs could lead to trouble. He pointed out that continued flows into small-cap and mid-cap equity schemes remain a concern as these stocks are considered expensive despite the recent sell-off.
He referenced historical periods, such as 1994-2002 and 2006-2013, when SIPs in mid-cap stocks failed to generate returns and, in some cases, led to capital erosion. Given this, he suggested that SIPs in such schemes may only be viable over a 20-year horizon, which is rare among investors. Instead, he recommended SIP investments in large-cap, flexi-cap, or equity-oriented hybrid funds.
Decline in Small-Cap Mutual Fund Inflows
The inflows into small-cap mutual funds declined significantly by 35%, dropping from ₹5,720 crore in January to ₹3,722 crore in February. However, on a year-on-year basis, inflows have surged by 27% from ₹2,922 crore in February 2024. The decline in SIP inflows into small and mid-cap funds highlights how retail investors tend to avoid risk during volatile market conditions.
Rajesh Minocha, a Certified Financial Planner and founder of Financial Radiance, noted that small-cap funds could benefit investors with an investment horizon of more than 15-20 years. However, he pointed out that many investors panic at the first sign of negative returns and exit their long-term plans. He emphasized the importance of professional guidance and goal-based investing to maintain a steady portfolio. Additionally, he suggested that those concerned about market fluctuations might find flexi-cap funds a safer option, as stock selection is left to professional fund managers.
Market Performance and Equity Fund Inflows
The Nifty Smallcap 250 index has declined by nearly 24% from its peak in September. Meanwhile, the benchmark BSE Sensex stood at 74,029 on Wednesday, up from 73,198 on February 28, 2025. Over the last three and six months, the BSE Sensex has dropped by around 9% each, while over the past nine months, it has fallen by 3.07%. In the last month alone, the index has declined by 4.50%.
On a monthly basis, all equity categories have seen a decline in inflows, except for focused funds, which experienced a 64% surge in inflows, rising from ₹783 crore in January to ₹1,287 crore in February. According to analysts, the consecutive 48 months of positive inflows reflect investor confidence despite market fluctuations.
Pankaj Shrestha, Head of Investment Services at PL Capital, noted that in February 2025, equity net inflows declined by 26% to ₹29,303 crore, marking a 10-month low. However, he highlighted that despite this dip, the market has sustained positive inflows for 48 consecutive months, indicating continued investor confidence. Large-cap funds saw only a slight decline, proving their resilience compared to other categories as investors preferred stability during market volatility.
Investor Strategy Amid Market Uncertainty
Commenting on the current investment strategy, Rajesh Minocha advised investors to make decisions based on their individual financial goals, risk appetite, and investment horizon rather than reacting to external market factors beyond their control. He emphasized that SIPs and STPs should continue, and investors with a minimum five-year horizon could consider a partial lump-sum investment. He pointed out that after a 14% market correction over the past five months, valuations are becoming attractive and present a good investment opportunity.
However, he also cautioned investors to remain patient, as further market declines are possible due to geopolitical risks and weak domestic earnings. He advised moderating return expectations to a more realistic 11-13%, particularly for new investors who have grown accustomed to high post-pandemic returns.
Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics, also encouraged investors to continue investing through SIPs, citing India’s structural growth story and strong position in the global economy. He expressed confidence that retail investors would maintain their SIP contributions in the long run.
Growth Potential for the Mutual Fund Industry in 2025
Despite market fluctuations, the mutual fund industry is expected to continue growing in 2025, driven by rising investor participation from smaller cities, sector-specific investment opportunities, and increasing SIP adoption. ICRA Analytics predicts that the mutual fund sector will witness sustained growth as digital platforms enhance accessibility beyond metropolitan areas.
Investor interest in high-growth sectors such as technology, renewable energy, banking, and consumer durables is also expected to rise. Sectoral and thematic funds focused on these industries are likely to attract more capital in 2025, given their strong growth potential.
SIP contributions have surged by 40.45%, reaching ₹26,459 crore in December 2024. This trend reflects a shift towards disciplined, long-term investing, which is expected to be a key driver of mutual fund growth in the coming year. While large-cap funds will continue to provide stability, mid-cap and small-cap funds are gaining traction among investors seeking higher returns.
Economic Support and New Fund Offerings
India’s strong economic fundamentals and government initiatives are expected to provide a favorable environment for the growth of mutual funds. The industry saw the launch of 239 new fund offerings (NFOs) in 2024, raising ₹1,18,519 crore. Continued innovation in fund offerings, including sectoral, thematic, and hybrid funds, is expanding investor options and providing greater diversification opportunities.
Potential Challenges in 2025
While the outlook for the mutual fund industry remains positive, certain challenges could impact its growth. Rising inflation, oil price fluctuations, and unpredictable monsoons pose risks that could influence investor sentiment. However, these factors are not expected to derail the overall upward trajectory of mutual fund investments in 2025.
Conclusion
Despite recent market volatility, the resilience of SIP inflows highlights continued investor confidence in mutual funds. While small-cap and mid-cap investments remain under scrutiny due to valuation concerns, experts suggest that disciplined investing with a long-term approach remains the key to navigating uncertain market conditions. As the mutual fund industry adapts to changing investor preferences and economic trends, it is poised for further expansion in 2025.
