Mutual Fund Industry in 2025: SIP Amounts Reduced by 1.5% MoM in Feb; What’s Ahead?

The Indian mutual fund industry has been a remarkable success story over the past decade, transforming how the average Indian invests. However, recent data suggests we might witness a shift in investor sentiment, particularly among retail participants who form the backbone of systematic investment plans (SIPs).

For people who do not have good skin and have good skin, the investment game in February 2025 paints a concerning picture. Has the prolonged market weakness finally begun to test the resolve of India's mutual fund investors?

The Shifting Landscape: AUM Trends Reveal Market Impact

India's mutual fund industry remains massive by any standard, with 1,739 schemes serving 23.23 crore folios as of February 28, 2025. However, the first signs of strain are becoming visible beneath this impressive foundation.

The overall mutual fund industry's assets under management (AUM) declined to ₹64.5 lakh crore in February, representing a worrying 4.04% month-on-month drop. The performance of open-ended equity-oriented funds is more concerning, where AUM fell to ₹27.4 lakh crore, shedding 7.03% in just one month.

This trend is exciting because of the disconnect between money flows and asset values. Despite receiving an aggregate net inflow of ₹1,87,977 crore in open-ended equity-oriented mutual funds from October 2024 to February 2025, the AUM of this category has fallen by ₹3,70,752 crore from September 2024 levels. That's a substantial 11.92% decline from the previous peak of ₹31,10,479 crore.

"This divergence between inflows and AUM decline highlights how market performance can overwhelm positive fund flows during correction phases," notes a senior fund manager I spoke with last week, who preferred not to be named. "We're seeing market value erosion outpacing fresh investments."

The data suggests that while investors remained relatively steadfast during the initial market downturn, their resolve might weaken as the bearish phase continues.

Equity Scheme Inflows: A Closer Look at the Numbers

Digging deeper into February's equity fund flows reveals a significant pullback in investor enthusiasm. Total equity open-ended mutual fund scheme net inflows for February 2025 registered at ₹29,303 crore, marking a substantial 26.2% decline compared to January.

The category-wise analysis provides even more insight into evolving investor behaviour:

• Focused Funds bucked the trend entirely, showing a 64.4% increase in net inflows – the only equity mutual fund category to witness positive month-on-month growth.
• Large Cap funds experienced relatively milder,  single digit  decline in net inflows.
• The real pain was felt in the Small Cap and Mid Cap segments, where flows declined by over 30%

This pattern suggests that investors are becoming more selective and risk-averse. They are pivoting toward more concentrated portfolios while rescinding their interest in higher-risk segments that had previously attracted substantial interest.

The market has been trending downward for several months, but retail investor reaction typically lags behind price movements. February's numbers indicate that this delayed response is now materialising meaningfully.

During previous correction phases, such as the one in late 2018, we saw a similar pattern where equity inflows remained resilient initially before showing significant declines as the correction persisted. The difference now is the scale of the mutual fund industry and the much larger retail participation through SIPs.

SIP Trends: Are Retail Investors Finally Blinking?

SIP contributions have been the backbone of India's mutual fund industry growth story, providing consistent inflows even during market turbulence. However, February's data indicates the first real cracks in this foundation.

For February 2025, SIP net inflows came in at ₹25,999 crore, dipping below the psychologically important ₹26,000 crore level for the first time in three months. While the absolute decline of ₹401 crore represents just a 1.52% month-on-month fall, the direction of the trend is more concerning than its magnitude.

Even more telling is the data on SIP account activity. In February, there were approximately 10 lakh net SIP closures (calculated from 55 lakh closures against 45 lakh new registrations), doubling from around 5 lakh net closures in January. The number of contributing SIPs fell by roughly 9 lakh from January levels, marking the first decline in six months.

I've been tracking SIP numbers for years, and this reversal stands out. New SIP registrations consistently outpaced closures throughout 2023 and most of 2024, even during temporary market setbacks. February's reversal suggests retail investors might be reaching their pain threshold after months of disappointing returns.

SIP AUM took an even bigger hit, falling to ₹12,37,784 crore in February – a substantial 6.22% month-on-month decline. This marks the second consecutive monthly drop. From the peak of ₹13,81,704 crore in September 2024, SIP AUM has now fallen by ₹1,43,920 crore (10.42%) over five months despite receiving aggregate net inflows of ₹1,29,501 crore during this period.

"When SIP AUM falls by more than the difference between inflows and outflows, it signals that market depreciation is the primary driver," explains a veteran mutual fund distributor. "But prolonged periods of negative returns can eventually test even disciplined investors' patience."

Historical Context: How Does This Compare to Previous Corrections?

It's worth examining how mutual fund flows behaved during previous market corrections to understand the current situation better. During the 2018 correction, when the market fell approximately 15% from peak to trough, equity fund inflows declined by around 60% from their peak levels over six months.

The COVID-19 crash saw a much sharper but shorter-lived reaction. Equity fund flows briefly turned negative in March and April 2020 before staging a V-shaped recovery as markets rebounded.

The current correction differs because it has been more gradual and prolonged than the COVID crash, yet more severe than the 2018 downturn. The extended nature of this bearish phase might explain why investor fatigue is only now becoming apparent in the data despite the market trending down for several months.

A Mumbai-based financial advisor, Vikram Mehta, offers some perspective: "Most of my clients understand that market corrections are normal and healthy. But human psychology being what it is, doubts inevitably creep in when losses persist for multiple months. The February numbers reflect that psychological reality."

What This Means for Different Types of Investors

For long-term investors with appropriate time horizons, the current pullback in sentiment may represent an opportunity rather than a threat. Historically, periods of waning retail enthusiasm have often coincided with market bottoms, though timing such inflexion points remains notoriously tricky.

For those actively managing their mutual fund portfolios, the divergent performance across categories suggests the importance of selective positioning. Focused funds' continuing inflow strength indicates that investors still see value in funds with high conviction positions, even as they reduce exposure to broader market segments.

New investors considering entering the market should view the current situation as a reminder that mutual fund investments require patience and perspective. The fact that flows are moderating after a prolonged downtrend suggests we may be closer to a market bottom than a top – though this observation comes with the standard caveat that markets can remain irrational longer than most investors expect.

Looking Ahead: What to Watch in Coming Months

Several key metrics will determine whether February's data represents a temporary blip or the beginning of a more sustained shift in investor behaviour:

1. SIP stoppage ratio: If the gap between new registrations and closures continues to widen in March and April, it would confirm waning retail conviction

2. Category-specific flows: Further concentration of inflows in specific fund categories would indicate increasing investor selectivity rather than broad-based pessimism

3. Lumpsum investments: These tend to be more sensitive to market conditions than SIPs, so any sharp decline here would signal heightened investor caution

4. Redemption pressure: So far, the issue has been moderating inflows rather than accelerating outflows – any change in this pattern would represent a more concerning development

"The true test of investor maturity isn't how they behave during bull markets, but how they respond to corrections," observes Mehta. "The coming months will reveal whether the SIP culture that's taken root in India over the past decade has created a new generation of disciplined, patient investors."

The Bottom Line

After months of market weakness, February's mutual fund data reveals the first meaningful signs of eroding retail investor conviction. While the absolute declines in inflows remain modest, particularly for SIPs, the directional shift and increasing SIP closures warrant attention.

For the mutual fund industry, which has worked hard to cultivate a culture of disciplined, long-term investing, the coming months represent a critical test. Will the SIP habit prove resilient enough to weather an extended downturn, or will retail investors increasingly head for the exits if market weakness persists?

History suggests most corrections eventually give way to new market advances, but investment decisions made during periods of uncertainty often determine long-term results. Warren Buffett said, "The stock market transfers money from the impatient to the patient."

The February data suggests India's mutual fund investors may be starting to test the limits of their patience. Whether this represents a temporary wobble or the beginning of a more significant shift in investor behaviour remains to be seen.