What will happen when you miss or stop a SIP?
Investors might face situations where they are unable to make their Systematic Investment Plan (SIP) instalments in mutual funds. This could be because of financial emergency or higher expenses. So, what happens when an investor doesn’t make the SIP payment?
When you miss a SIP…
While the fund houses don’t penalize investors for non-payment of a SIP instalment, the SIPs might be automatically cancelled if an investor doesn’t make SIP payments for three consecutive months. Why? This is because the ECS mandates say that the fund house needs to send auto debit requests for at least three months before cancelling any SIP. So, the fund house will wait for three months to see if you are continuing your SIP.
Note that your bank (which you are using for the auto debits) might charge you for missing the SIP instalment. This is because you give standing instructions to the fund house to debit a fixed amount from your bank account every month (or quarter). Missing a SIP instalment is like a cheque bounce for the bank. So, charges are applicable. However, the charges might vary from bank to bank. For instance, while ICICI Bank charges Rs. 350 for missing a SIP instalment, HDFC Bank charges Rs. 450 plus Goods and Services Tax (GST).
When you stop a SIP…
Think you may not be able to pay the SIP instalments for many more months? Then, you could stop the SIP. You can stop the SIP by sending a Stop Request to the fund house. This should be done at least 30 days in advance if you are submitting a paper request offline. You can submit the request online too. It takes about 10 days if you submit the request through the online channel. You can start a fresh SIP later when your financial situation improves. You can start another SIP in the same folio even after the earlier SIP was stopped. However, this will be regarded as a fresh SIP and hence you need to set up the SIP.
What happens when you miss or stop a SIP?
When you miss or stop a SIP, the investments you have done so far will continue to remain invested in the mutual fund. So, that money will keep earning returns for you. So, missing or stopping a SIP is not selling or redeeming the investment. To redeem your investments, you will need to give a redemption request to the fund house online or using the Redemption Request form.
While investments made so far have no impact, your wealth creation will be affected in the long term. Missing a single SIP may not have much of an impact on your investment. However, stopping your SIP can lower the returns from your investment and you might have less money for the financial goal for which you have been saving. You will need to review your financial goal and investments made towards that goal if you stop your SIP. Another point is that stopping your SIP for too long could mean higher cost of investments. This is because SIP helps you average out investment costs as you invest irrespective of whether the markets are high or low. You buy more units when the markets fall, and you buy less units when the markets climb higher. So, by stopping your SIP you are missing out on the opportunities to buy units at a lower price, especially when the markets are volatile.
When to stop your SIP?
You shouldn’t stop the SIP whenever the markets crash. This defeats the purpose of the SIP. However, you can consider stopping your SIP is the investment objective of the fund has changed or if the fund is recategorized. This is to give you time to review the fund and see if you should continue with the fund or exit and choose another fund. You can also consider stopping the SIP if the manager of the fund changes or the fund’s returns are falling when compared to that of competitors. Even though SIPs are long term investments, it is good to review them to see that they are in line with your risk capacity and financial goal. So, the stock markets shouldn’t be the reason for stopping your SIP.
Is there an alternative to stopping SIP?
Yes. You can choose to pause your SIP by submitting a request to the fund house. This will help you stop your SIP instalments temporarily. Your SIP will start automatically after the pause period. Note that all fund houses may not provide SIP pause facility.
How to make up for stopping your SIP?
By making additional purchases in the scheme using the same folio, you can make up for the lower investments in the mutual fund. This can be done when you have enough funds. This additional purchase equivalent can be the SIP amount or higher, depending on your financial situation. This will help you to achieve the required wealth for your financial goal without any difficulty.
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