Systematic Investment Plans (SIPs) are marketed as the most disciplined and reliable way for ordinary investors to participate in capital markets. By contributing small sums every month into mutual funds, investors can supposedly build long-term wealth through the power of compounding.
But what happens when SIPs fail — when investors panic and stop contributions, redeem at a loss, or hold underperforming funds for years? While investors walk away disillusioned and poorer, Asset Management Companies (AMCs) still profit.
This is the hidden truth of the SIP ecosystem: even “failed” SIPs generate steady revenue for fund houses through fees, charges, and systemic incentives. For AMCs, failure is not a catastrophe — it is business as usual.
What Is a “Failed SIP”?
A failed SIP does not mean fraud. It refers to situations where:
- Investors stop contributions mid-way due to financial stress or disillusionment.
- Portfolios underperform, delivering low or negative returns.
- Investors redeem prematurely, often during market downturns.
- Goals tied to SIPs are not achieved despite years of contributions.
For investors, this is failure. But for AMCs, every rupee that flowed in, however briefly, has already generated income.
How AMCs Make Money Regardless
1. Expense Ratios
AMCs charge a percentage of assets under management (AUM) as fees. Whether funds rise or fall, the AMC collects its cut.
- Example: A 2% expense ratio on ₹1,000 crore AUM = ₹20 crore revenue, regardless of performance.
- Even if investors redeem later, the AMC already booked the fees.
2. Front-Loaded Commissions
Although upfront commissions are restricted in some markets, trail commissions and marketing fees still ensure distributors and AMCs profit the moment SIPs begin.
3. Exit Loads
When investors redeem prematurely, AMCs often levy exit loads (1–2%). This penalty becomes direct revenue for the fund, indirectly benefiting the AMC.
4. Scale Advantage
Even dormant or stopped SIPs add to AUM figures temporarily, allowing AMCs to boast of larger scale and attract more institutional investors.
5. Fund Proliferation
AMCs launch multiple SIP-eligible schemes, knowing some will fail. Underperformers still generate years of fees before being merged or closed.
The Incentives Behind the System
- AMCs Want Stickiness, Not Success: Even short-lived SIPs provide fee streams.
- Distributors Want Volume: More SIPs mean more trail commissions, regardless of outcomes.
- Banks Want Cross-Sell Revenues: RMs push SIPs aggressively because each new plan means fee income.
This alignment of incentives ensures AMCs and intermediaries profit even when investors don’t.
Case Studies
Case 1: The 2008 Crisis
Many investors stopped SIPs during the global financial meltdown. AMCs lost future inflows, but they had already collected years of expense ratio fees. Exit loads added bonus income when panicked investors redeemed.
Case 2: Mid-Cap Fund Bust (2018–2020)
Mid- and small-cap funds underperformed sharply. SIP investors exited with losses. AMCs, however, still reported growing revenues thanks to high AUM during boom years and fees collected throughout.
Case 3: Debt Fund Defaults in India
When corporate bond defaults hit debt mutual funds, many SIP investors faced frozen redemptions or writedowns. AMCs charged management fees even during the freeze, profiting while investors absorbed losses.
The AMC Playbook for Profiting from Failures
- Encourage Long Lock-Ins
ELSS SIPs lock investors for 3 years, guaranteeing fees regardless of performance. - Promote Risky Funds to Conservative Investors
Even if unsuitable, riskier schemes have higher potential yields and attract inflows, boosting AMC fee income. - Over-Marketing Popular Themes
Sectoral or thematic funds launched during booms rake in SIP inflows. When themes collapse, investors lose — but AMCs have already profited. - Exit Load Dependence
Penalties ensure redemptions contribute to AMC revenues. - Evergreen Branding
Failed funds are quietly merged into better performers. Investors forget, but AMCs retain credibility and scale.
Why Investors Rarely Notice
- Opacity of Fees
Expense ratios are deducted silently from NAVs. Investors see lower returns but rarely connect losses to AMC revenue. - Marketing Focus
Ads highlight success stories, never mentioning failed SIPs. - Behavioral Bias
Investors blame themselves for stopping SIPs rather than questioning AMC incentives. - Regulatory Cushion
Disclaimers like “Mutual fund investments are subject to market risks” shield AMCs from accountability.
The Human Cost
For investors, failed SIPs mean:
- Missed financial goals like education or retirement.
- Erosion of trust in capital markets.
- Reduced household savings due to losses.
- Emotional distress from feeling cheated or misled.
Meanwhile, AMCs continue reporting record profits and growing AUM, widening the trust gap.
The Regulator’s Role
Current Rules
- SEBI mandates disclosures of expense ratios and risks.
- Some reforms capped commissions and front loads.
Weaknesses
- Investors rarely understand fee structures.
- Exit loads remain a hidden revenue stream.
- Suitability checks are superficial, allowing mis-selling.
Needed Reforms
- Plain-language disclosure of fees and lock-ins at the point of sale.
- Caps on exit load revenue benefiting AMCs.
- Linking AMC compensation to long-term investor returns, not AUM.
Global Parallels
- UK PPI Scandal: Banks profited from mis-sold protection plans, similar to how AMCs profit from unsuitable SIPs.
- U.S. 401(k) Fees: Retirement funds charged hidden fees even when returns underperformed.
- Asia’s Minibond Scandals: Structured products mis-sold as safe investments, with issuers profiting despite investor losses.
Why the Cycle Persists
The SIP ecosystem thrives on three illusions:
- Guaranteed Positive Returns: Ads sell certainty.
- Low Costs: Investors underestimate the impact of expense ratios.
- Investor Responsibility: Failures are blamed on market volatility or investor behavior, never AMC structures.
As long as these myths persist, AMCs will keep profiting from SIPs — whether they succeed or fail.
How Investors Can Protect Themselves
- Scrutinize Expense Ratios: Higher fees compound against you.
- Diversify SIPs: Avoid concentration in high-risk thematic funds.
- Ignore Unrealistic Promises: SIPs are market-linked, not guaranteed.
- Exit Prudently: Avoid panic redemptions that trigger exit loads.
- Consider Direct Plans: Reduce AMC and distributor commissions.
Could AMC Profits From Failures Spark Backlash?
Yes. If prolonged underperformance hits large numbers of SIP investors, public anger could force regulators to act. Legal challenges, investor movements, or class-action suits could emerge — similar to scandals in other financial markets.
Conclusion
SIPs remain one of the most effective tools for long-term investing, but their misuse and mis-selling have created systemic problems. The real scandal is not that SIPs fail for some investors — markets are inherently risky — but that AMCs continue to profit handsomely from these failures.
By prioritizing AUM growth and fee extraction over investor outcomes, AMCs create a cycle where investor disappointment funds corporate success.
The solution lies in transparency, tighter regulation, and investor awareness. Until then, the uncomfortable truth is that failed SIPs are not failures for AMCs — they are part of the business model.
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