The Why
In this edition of Macro Brew, I examine whether stress in the Indian equity market influences investor behaviour in systematic investment plans (SIPs). The question being tried to answer here is, Do investors continue their SIPs during market drawdowns, or do they cancel them out of fear of further losses?
The core hypothesis is that periods of market stress may lead to structural declines in domestic institutional investor (DII) inflows if retail investors pause or terminate their SIP contributions in response to falling markets. If SIPs are truly systematic and resilient through market cycles, then investor contributions should remain relatively stable even during corrections. However, if investors respond to market declines by withdrawing or pausing their investments, the perceived stability of SIP flows may be overstated.
The Stakes
SIPs are widely regarded as “sticky money” in the Indian mutual fund ecosystem. Because they represent disciplined and recurring retail investments, SIPs are often assumed to continue through market cycles regardless of short-term volatility. This perception has important implications for market stability. Consistent SIP inflows are frequently viewed as a structural cushion that supports domestic institutional investor buying during periods of equity market volatility, especially when foreign portfolio flows turn negative.
If these flows remain stable during downturns, they can act as a stabilizing force by providing continuous domestic demand for equities. However, if retail investors pause or cancel SIPs during market stress, the stabilizing role attributed to SIP flows may be weaker than commonly believed. Against this backdrop, the analysis seeks to answer a straightforward question: when the equity market experiences stress, does aggregate equity mutual fund AUM growth weaken meaningfully, or does it remain resilient? Understanding this relationship helps assess whether retail capital truly behaves as a stabilizing force during market downturns.
Pinch(es) of Salt
Before interpreting the results, it is important to recognize several limitations in the framework.
1. AUM growth is not the same as SIP inflows
Growth in equity mutual fund AUM is not the same as the amount of money coming in through SIPs. Monthly AUM changes reflect two components.
The first is net investor flows, which represent new investments minus withdrawals. The second is changes in the market value of the existing portfolio, which capture mark-to-market movements in the value of the assets held by the fund. During market drawdowns, the mark-to-market decline in portfolio values can reduce or slow AUM growth even if SIP inflows remain positive. In other words, steady SIP contributions may not be enough to offset the fall in the market value of the assets already held by the funds.
2. Not all the big money in equity mutual funds comes through SIPs
Aggregate equity mutual fund AUM includes several types of investments beyond SIPs. It may contain lump-sum investments, institutional allocations, switches between schemes, systematic transfer plans (STP), systematic withdrawal plans (SWP), and other investor categories depending on how the AMFI data is constructed. Because of this, the idea that SIPs are “sticky” does not automatically imply that total equity AUM growth will remain stable during periods of market stress.
3. Market stress can influence investor behaviour
Market downturns can change how investors behave. When markets fall, some investors rush to redeem their investments to limit losses. Lump-sum investors may pull money out during uncertain periods, while others may pause their SIPs or hold back on making fresh contributions. Some may even shift their money away from equity funds and into relatively safer options such as debt funds. Broader economic conditions can amplify this behaviour. Income uncertainty, job losses, or disruptions like those seen during the COVID period can make households more cautious with their money. In such situations, discretionary investments may slow down, even if some long-term SIP commitments continue.
What the Analysis Ultimately Asks
The empirical question of the analysis is straightforward. When we compare month-on-month equity mutual fund AUM growth with the market’s drawdown from its peak, does AUM growth show sensitivity to market stress?
If AUM growth weakens significantly during deeper drawdowns, it would suggest that investor behaviour and valuation effects continue to dominate aggregate fund flows. On the other hand, if AUM growth remains relatively stable despite market stress, it would lend support to the narrative that SIP flows provide resilient domestic capital to the equity market.
The Data Stuff
The analysis relies on two core variables.
The first is monthly equity mutual fund AUM data published by the Association of Mutual Funds in India (AMFI). This dataset captures the total assets held in equity-oriented schemes and reflects the combined impact of market movements and investor flows.
The second variable is market stress, proxied using the drawdown of the Nifty index from its recent peak. Drawdown measures the percentage decline from the highest observed level of the index and serves as a practical indicator of periods when the equity market is experiencing meaningful corrections or stress.
In addition to the core variables, several derived indicators are constructed to capture market dynamics more effectively.
These include month-on-month AUM growth, which measures changes in total equity mutual fund assets. A one-month lag of AUM growth is included to capture potential delayed responses in investor behaviour.
Market returns are incorporated to control for the direct impact of equity market performance on fund valuations. Additional measures such as drawdown magnitude and drawdown duration help capture both the depth and persistence of market stress.
The Regression Stuff
I tried to dish out a few regression models to answer different questions pertaining to these two core variables. This is an attempt to dumb all of them down for everyone to understand.
Model 1: Do equity mutual fund AUM growth months look better or worse when the market is in drawdown?
We begin with the simplest possible specification, including only market drawdowns as the explanatory variable. The results reveal a strong and statistically significant relationship between market stress and AUM growth. The drawdown coefficient is 0.4835 (t = 6.75, p < 0.001), implying that deeper market declines are associated with weaker mutual fund asset growth. In economic terms, a 10% market drawdown reduces AUM growth by roughly 4.8 percentage points. The model explains a meaningful portion of investor behaviour, with an R² of 0.391. Even after adjusting for heteroskedasticity using robust HC3 standard errors, the relationship remains statistically significant (robust p = 0.015).
SIP investors do not panic during corrections, but they do slow down their incremental buying when markets fall.
Model 2: Does it matter how long the market has been in drawdown, not just how deep it is?
We extend the analysis by adding drawdown duration to test whether investors react differently when declines persist for longer periods.
The results show that the drawdown coefficient remains strong at 0.4960 (p < 0.001; robust p = 0.026), while drawdown duration is statistically insignificant (coefficient = 0.0006, p = 0.590). The model’s explanatory power remains almost unchanged (R² = 0.394).
This suggests that investors primarily respond to how severe the fall is rather than how long it lasts. A sharp correction appears to trigger caution quickly, but prolonged sideways markets do not substantially worsen the effect.
In behavioural terms, investor response appears to be driven more by market pain than market patience.
Model 3: If AUM growth was strong/weak last month, does that carry into this month, even after accounting for drawdown?
We test whether flows simply follow their own momentum by introducing a 1 month lagged AUM growth as an explanatory variable. If mutual fund flows were trend-driven, previous inflows should predict current inflows. However, the results do not support this hypothesis.
While the drawdown coefficient remains large at 0.4595 (p < 0.001), lagged AUM growth is statistically insignificant (coefficient = 0.0626, p = 0.565). The overall explanatory power remains similar (R² = 0.393).
The implication is that mutual fund flows are not primarily driven by momentum or habit persistence, but instead respond to market conditions themselves.
Model 4: Is the AUM growth still tied to how far the market is below its peak (drawdown), after we also account for how the market did that same month (market return)?
We incorporate market returns alongside drawdowns, allowing the regression to capture both positive and negative market dynamics. This produces the strongest specification. The drawdown coefficient is 0.3410 (p < 0.001) and the market return coefficient is 0.3227 (p < 0.001). The model substantially improves explanatory power with an R² of 0.527, meaning more than half of the variation in AUM growth is now explained by market conditions.
The interpretation now reinforces the original idea that: positive market performance strengthens flows, while drawdowns weaken them. Retail investors therefore appear moderately procyclical. They continue investing during corrections, but become more enthusiastic buyers when markets rise.
The Bottom Line
The evidence suggests that most investors do stay the course. Even during market corrections, SIPs are rarely switched off en masse, and retail money continues to flow into equity mutual funds. This reinforces the idea that SIPs provide a relatively stable base of domestic participation in the market.
At the same time, investors are still human. Deeper market declines tend to coincide with slower AUM growth, suggesting that enthusiasm cools when markets fall. Investors usually don’t abandon their SIPs, but they may become more cautious with additional investments.
In short, SIPs remain largely systematic but the sentiment of the investors behind them still moves with the market.