Thursday, December 29, 2016

What happens if I forget to pay my SIP installments?

"What happens if I forget to pay my SIP installments? Will I be fined?" Click on this link to read the answer.

The English translation is as under:

“Is there any penalty, if I skip an installment or two of my SIP?”
“What is the minimum period for which I must continue my SIP? What if I don’t? Will my money be confiscated?”
These are some of the questions that I regularly face during my interactions with investors, especially in large investor meetings. I tried to understand why these questions keep coming. I think the primary reason is that SIPs in mutual funds are being compared with other forms of regular savings, e.g. recurring deposits, insurance premia, PPF contributions. Even EMIs on loans have various conditions regarding regularity and term.
SIP in a mutual fund scheme, on the other hand is just a convenience and not a compulsion. At best, it can be termed as a commitment to yourselves. To that extent, one may start an SIP for 100 years and then discontinue the same after a few months. While the future installments would not be deposited in the SIP account, all the previous installments would continue as investments in the same mutual fund account.
We have discussed in the past about various benefits of SIP. Let us highlight some of the operational aspects of the same to clarify and answer the questions raised in the beginning. SIP offers some great operational conveniences to channel your regular savings into investments of your choice. The investments can be made in equity funds, balanced funds, debt funds, liquid funds, international fund or even gold funds – you can choose the option.
You are required to give post-dated cheques or a standing instruction to your bank through NACH mandate registration. The period can be chosen based on your cash flow – if you are 55 years and wish to invest for the next 5 years till your retirement, start an SIP for 5 years. If you are 27 years old and do an SIP for purchasing a house when you turn 33, start an SIP for 6 years. If you are 31 year old with a 1-year-old daughter, you may start a 16-year SIP to fund her college education.
If you want to increase the amount of SIP, there are few fund houses that offer you to mention this right at the beginning – you may increase your monthly investment amount every year by a certain amount. If such option is not available with the fund house you have chosen, you may always start another SIP – either in the same scheme or any other scheme. If you wish to change the scheme, you may discontinue your SIP in the present scheme and start in another one. All these flexibilities make it convenient for an investor.
Now let us come to the commitment part. What if your cheque bounces? Not to worry. Most fund houses do not charge any penalty for that. However, in majority of the cases, if three of your cheques bounce or a certain number of (three, in many cases) consecutive debits are rejected by your bank (for whatever reasons), the fund house may consider it as you are not interested in continuing the SIP and hence stop depositing your cheques or cancel the debit (NACH) mandate to debit money from your bank account. In case such a thing happened by mistake, you may always restart an SIP – either in the same account or in another. There is no revival charge.
At the same time, let us understand the penalty aspect of any commitment. If you enter into an agreement, and want to terminate the same before the due date, there could be penalty payable to the other party, as per the terms of the agreement. As we have already mentioned, an SIP is your commitment only to yourself and nobody else. This means, if there is any penalty levied – who would pay and who would get it? The penalty is levied by your present self and paid by your future self. In other terms, while your present self may indulge into some spending, the future self is deprived off wealth and hence purchasing power. This affects the lifestyle of your future self. Be aware of this penalty. Understand the implication of this. Plan your SIP keeping in mind your present requirements as well as your future requirements. Strike a proper balance so that you enjoy life in the present as well as in the future.
So, please go ahead. Plan an SIP for your future needs, as permitted by your cash flow.
- Amit Trivedi

1 comment:

  1. Hey, thanks for the information. your posts are informative and useful.
    Axis Bank