Can't pay mutual fund SIP? Missing SIP installment attract hefty penalty; how to decide when to pause or stop SIP
Systematic investment plans (SIPs) are a convenient way to invest regularly in mutual funds. Most investors who go for mutual fund SIPs, usually opt for autopay or auto-debit facility where a fixed amount of money gets deducted from their bank accounts every month. The disciplined way of investing every month builds a corpus gradually over time. Moreover, investors do not have to go through the hassle of remembering the due dates of SIP installments and make payments every month. All in all, auto-debit has made the lives of mutual fund SIP investors easy. However, there may be times when you don't have sufficient balance in your account to pay the monthly installment of your SIP mutual fund investment. What happens when you miss your mutual fund SIP installment due to insufficient balance? If you can't afford to continue a SIP, should you pause it or exit — how can you make that decision? ET Wealth Online explains.What happens if you miss a SIP installment?
Do you have to pay a penalty if you don't have money in your bank account to pay your SIP installment? Mutual fund houses usually do not levy any penalty if you miss your SIP installment for up to three months. Further, your SIP will continue as it is. However, if you default on your monthly SIP installment by not maintaining sufficient balance in your bank account, the bank may levy a fee or penalty. It is charged for not maintaining enough balance in your bank account for auto-debit mandate through Electronic Clearing Service (ECS) or National Automated Clearing House (NACH). Banks typically charge between Rs 100 and Rs 750 as a penalty each time the SIP autopay mandate fails due to insufficient bank balance, says Nishant Srivastava, CEO, Torus Private Wealth.For instance, you have four mutual fund SIPs of Rs 500 each, and the amount gets automatically debited from your Kotak Mahindra Bank savings account every month through ECS/NACH. If you do not have enough money in your bank account on the day of the monthly SIP payment, you will have to pay up to Rs 590 (Rs 500 + 18% GST) for each failed transaction. So, you may have to pay Rs 2,360 for missing four SIP installments in just one month. The charges will vary from one bank to another.
Added to this, if you miss three consecutive monthly SIP installments, it will lead to the cancellation of your mutual fund SIP. Explaining this further, Saurav Basu, Head - of Wealth Management, at Tata Capital, says, "Starting April 1, 2024, SEBI's new regulations consider consecutive failed payments as grounds for canceling SIPs, based on their frequency. For daily, weekly, fortnightly, or monthly SIPs, three consecutive failed payments will lead to cancellation. For longer frequencies like quarterly, half-yearly, or yearly SIPs, cancellation occurs after two consecutive failed payments."
Pausing SIP: How does it work? How long can you pause your SIP installment?
When you don't have money to pay for your monthly SIP installment, is it prudent to pause it? Before deciding, let's understand what it is and how it works. Most mutual funds typically offer you an option to pause your mutual fund SIP. However, they usually have limits on how many times and how long you can pause it. Rahul Jain, President & Head, of Nuvama Wealth says, "The industry does not follow a standard policy. Most fund houses allow investors to pause SIP for three to six months."Moreover, the pause facility may not always be available for any amount or frequency of SIPs, such as monthly, quarterly, and yearly. For example, Axis Mutual Fund and Nippon India Mutual Fund allow pausing SIPs only if the installment amount exceeds Rs 1,000 and has been active for at least six months, says Gurpreet Sidana, CEO, Religare Broking. On the other hand, other Asset Management Companies (AMCs) such as ICICI Prudential Mutual Fund, SBI Mutual Fund and Aditya Birla Mutual Fund do not have such restrictions on amounts for pausing SIPs.
"Edelweiss Mutual Fund allows you to pause up to two times during the lifecycle of the SIP, and only if the SIP has completed six instalments. Mirae Asset Mutual Fund allows investors to pause up to two times during the lifecycle of the SIP," says Srivastava of Torus Private Wealth.
However, investors of SBI Mutual Fund can pause SIP multiple times during the tenure and it is available for all frequencies. ICICI Prudential Mutual Fund investors can pause only once during the period of existing SIP. Further, the pause option is available only for monthly SIPs. Similarly, HDFC Mutual Fund allows you to pause your SIP only once during the tenure if you pay monthly or quarterly installments.
Want to pause your SIP installment? Know when you should raise the request
Even when you decide to pause your next SIP installment, it is not guaranteed to be processed unless it is done on time. Remember that you must inform your fund house well in advance. "Minimum five days are required for SIP pause registration here," Shaily Gang, Head-Products, Tata Asset Management. Mutual fund houses usually send a mandate to the bank to deduct money from your account five to seven days before the SIP installment date. When you pause a SIP, the mutual fund house does not send debit instructions to the bank account for that particular period, says Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Investment Managers.Shlok Srivastav, Co-founder & COO, Appreciate Wealth, an online trading platform, advises investors to inform the mutual fund house at least 15-20 days before their SIP installment dates to pause the SIP.
Once the pause period is over, the SIP will automatically be resumed for the next installment.
Cancelling your SIP? Here are the charges
The other option is to cancel your SIP when you cannot pay the installments at all. There will be no deduction of SIP installment from the next month and money deducted till date will remain invested in the scheme. However, in case you need money, you can even withdraw your funds by exiting from the mutual fund scheme. Mutual fund houses usually charge a fee, known as an exit load, if the investors exits a fund within a certain period from the date of investment. "Mutual funds charge an exit load of anywhere, generally between 0.5% and 2% of the NAV," according to DSP Mutual Fund.Don't have enough balance to pay SIP installment? What you should do
If you do not have a balance in your savings account, it is not advisable to continue the SIP as the bank will levy charges for a failed auto-debit mandate, says Khanolkar of Mirae Asset Investment Managers. The next question is whether you should pause or cancel your SIP during a financial crunch.Should you pause or break your SIP? Here's how to decide
Nirav Karkera, Research Analyst, at Fisdom, says, "If the financial constraint is temporary, such as a short-term liquidity crunch or unexpected expenses, pausing the SIP may be a suitable option. This allows investors to maintain their investment discipline and avoid discontinuity in long-term wealth accumulation. However, it's crucial to resume contributions as soon as financially feasible to prevent missing out on potential returns and disrupting the compounding effect."Those investors who pause their mutual fund SIPs should keep in mind that the SIP will restart as soon as the pause period is over. They need to manage cash flow accordingly so that they canto pay their SIP installments on time once it starts, explains Piyush Gupta, Director-Funds Research, CRISIL Market Intelligence & Analytics.
On the other hand, if the financial situation requires a significant restructuring of expenses or if investment goals have changed permanently, breaking the SIP may be necessary, he adds. However, this decision could impact long-term wealth accumulation and disrupt the disciplined investment approach.
Gupta of CRISIL Market Intelligence & Analytics, says, "Any investment should be pegged to a financial goal. In case of any need to pause or break, investors should factor in implications on the financial goal before deciding."
Cancel your SIP only if it is your last resort
Gupta adds, "SIP pause earlier in the investment journey of a long-term investment goal may have more impact on the final output since the money invested in the one, two or three periods in a 10-year horizon would have more period to compound compared with money paused in the latter period. However, this is subject to the performance of the underlying market during the investment horizon."So, it is prudent to avoid pausing SIP during the early years of investment unless it is your last resort. As most of the mutual fund houses give you the option to pause your fund one to two times during the entire tenure, it is wise to save it for the later years and use it when there is no other option. If you use it within the first few years of your investment, then later you will not have any other options other than canceling SIPs in case of unforeseen financial circumstances later.
Before deciding to pause or break the SIP, considering the importance of maintaining investment discipline and regular contributions to achieve financial objectives is key. Exploring alternative solutions, such as reducing the SIP amount or reallocating funds, should be done. Overall, a careful assessment of these factors is necessary to make an informed decision tailored to individual needs and circumstances. As SIP works on the formula of compounding, regular contribution can help you build a lumpsum corpus over a period. Breaking mutual funds in between will pose a threat.
This story originally appeared on: India Times - Author:Faqs of Insurances
