Is SEBI's Small Ticket SIP Proposal a Good Idea

At present it is the individual investors (retail + HNIs) who are holding a higher share of the industry's assets (at 61.4% in December 2024 as against 60.1% in December 2023). And interestingly, individual investors are largely holding or investing in equity-oriented mutual fund schemes. Thanks to the cult for equities, particularly since the lows of the COVID-19 pandemic.

Also, it is important that note that even the B30 locations (i.e. the locations beyond the top 30) are now increasingly participating in mutual funds, particularly the equity-oriented schemes. Around 27.1% of the individual assets are from B30 locations.

Systematic Investment Plans (SIPs) have gained popularity among retail investors, helping them with rupee-cost averaging and investing in a disciplined manner without worrying about market volatility and timing the market. For these reasons, SIP contributions have touched an all-time high of Rs 2.11 trillion so far in FY25. The total SIP AUM today stands at Rs 10.72 trillion. Even amid intense volatility or market turbulence investors, by and large, investors have continued their SIP contributions.

Recognising these data points, SEBI has now released a Consultation Paper on 'Sachetisation of Mutual Funds'.

SEBI's Proposal - Sachetisation of Mutual Funds

Sachetisation of Mutual Funds according to the regulator, would enable greater financial inclusion to inculcate the habit of systematic saving and facilitate investment of small savings by investors new to the mutual fund space. It shall help increase the reach of mutual funds across the country, to facilitate participation from low-income group sections of the society.

The small ticket investment in mutual funds gradually on a periodic basis can assist in the financial empowerment of the underserved section of the economy and nudge fund houses to expand their footprints to even remote locations in the country, according to SEBI.

SEBI has proposed a small ticket SIP of Rs 250/- in collaboration with the mutual fund industry. All intermediaries which are regulated by SEBI and which provide service and infrastructure support to mutual funds, have generously agreed to participate in this initiative to make the product viable and sustainable.

At present, while some mutual funds houses do permit small SIPs or micro SIPs of even as little as Rs 100/- for some of their schemes, others aren't doing so. Small ticket SIPs of Rs 250/-, according to SEBI, would provide an opportunity for the entire mutual fund industry to participate in the cause of financial inclusion.

Will It be Viable for the Mutual Fund Industry?

Considering the interest of the industry participants involved in the mutual fund space, the regulator has proposed that a part of the cost of investment for the Asset Management Companies (AMCs) and certain incentives for financial inclusion be compensated from the Investor Education and Awareness Fund. This shall further reduce the break-even time for AMCs and encourage further penetration of the financial product.

With subsidised charges offered by intermediaries and reimbursement of certain costs from the Investor Education and Awareness Fund, according to SEBI the cost of small ticket SIP of an investor new to the mutual Fund industry would break-even for the AMCs within 2 years.

As an incentive for distribution, it proposed that Rs 500/- (maximum) be provided to distributors/Execution Only Platforms (EOPs) for small ticket SIP. This incentive should be over and above the distribution commission payable by AMC to the distributor.

The funds collected by AMCs at the AMFI level for industry-based investor education and awareness programs shall be used for the incentive to distributors/EOPs for their efforts towards financial inclusion. The incentive should only be given to the distributors/EOPs on completion of 24 instalments (2 years for monthly SIP or 1 year for fortnightly SIP).

Here are the salient features of the Proposed Small Ticket SIP:

• The small ticket SIP of Rs 250/- SIP that an investor can start may be restricted to 3 SIPs (one each in up to 3 Asset Management Companies). AMCs can continue to offer Rs 250/- SIPs beyond three small ticket SIPs but the discounted rates offered by intermediaries will be restricted to only the first three Rs 250/- SIPs.

• The option of fortnightly small ticket SIPs.

• Small ticket SIPs may be offered under the Growth Option of the plan.

• The Small ticket SIPs can be offered in any scheme except for Debt schemes, Sectoral & Thematic Schemes, Small-cap and Mid-cap Schemes under the equity schemes category.

• The commitment by an investor under a small ticket SIP scheme should be for 5 years i.e. 60 investments. However, if an investor desires to stop SIP or withdraw the SIP investment prematurely, there should be no restriction on it.

• The mode of payment/investment for small ticket SIP may be restricted to National Automated Clearing House (NACH) and Unified Payment Interface (UPI) auto-pay mode.

• The small ticket SIP may be in Statement of Account (SOA) mode or demat mode.

• The Know Your Customer (KYC) cost incurred by the scheme for small ticket SIP may be compensated from the fund collected by AMCs by charging 1 bps to mutual fund Schemes for investor education and awareness.

• In the case of PAN-exempted KYC Registration Number (PEKRN) will be available for small ticket SIP.

• KYC Registration Agencies (KRAs) have to ensure that multiple PEKRNs are not issued to a single investor (with different ID proofs). Therefore, if PAN is not provided by an investor for KYC, AADHAR card shall be mandated for issuance of new PEKRN, as AADHAR can be uniquely validated.

To facilitate this proposal of small ticket SIP, SEBI has made it clear to AMCs that they shall ensure that a valid mobile number of an investor of small ticket SIPs is in their record, for statutory disclosures. Email id may be optional for small ticket SIPs.

Further, statutory disclosures to unitholders shall be through a registered mobile number and email id (if provided by the investor). If disclosure is made to investors through a link on a mobile number and/or email id, the link should remain active at all times and investors should be able to download the disclosures made thereunder.

Should opt for small ticket or micro SIPs? Watch this video:

At present, the regulator has placed this proposal for the Sachetisation of Mutual Funds with small ticket SIPs for public comments until February 6, 2025. One can comment or make suggestions on this proposal here- https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes

To Sum up...

Lowering the minimum investment for SIPs shall result in the next phase of growth of SIP AUM with financial inclusion.

In advanced economies, such as the U.S., mutual funds allow investment as low as US$ 5, US$ 10 and so on. For this reason, a large section of the population in the U.S. (nearly 54% as of the end of CY2024) owns mutual funds in their portfolio, while in the case of India is roughly 8%. At present, it is mainly the middle class, upper-middle class and the affluent who have investments in various mutual fund schemes.

So, there is much merit in offering small ticket SIP or micro-SIP; it is a step in the right direction. It will allow access to a large section of India's population to invest in mutual funds.

That being said, the key is educating investors to link their investments with the envisioned financial goals. It is also important that AMCs provide easy-to-understand products and make their marketing literature lucid.

Also for the investors it is important to remember that while mutual fund SIPs offer great benefits, such as convenience, are easy on the wallet, instils the necessary investment discipline, make timing the market irrelevant, help mitigate the market volatility (i.e. rupee-cost average), and potentially compounds hard-earned money; the SIP contributions you make need to meaningful to beat inflation and help you meet your long-term financial goals.

Opting for small ticket SIPs of Rs 250, will not necessarily serve you in accomplishing certain important financial goals, such as your child's education, wedding expenses and your retirement. While you may start small, over time it is important to step up SIP amounts meaningfully.

Be a thoughtful investor.

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.