Mutual funds and SIP have gained quite traction and popularity in recent times. One of the biggest myths around SIP is that investors assume that it is an investment option wherein you invest your money. However, it is simply an investment tool to help you invest in investment options. Basically, SIPs help to invest in mutual funds and other investment options.
SIP investments are quite convenient to investors. As per an investor’s needs and requirements, an investor can customize their SIP investments. If they have an irregular source of income or salary, they can choose to invest in variable SIP investment. If they are expecting that their salary or income gradually increases over time and they wish to maintain their savings vs income ratio, then they can choose to invest in step-up or top-up SIPs. If they wish to invest in mutual funds through SIP for indefinitely, they can choose perpetual SIPs. What’s more, they can even pause or stop their SIP investments. However, have you ever wondered what happens when you miss an SIP installment? Do you know what are the consequence of missing your SIP installments? Let’s find out.
Several investors fear that the fund house or the AMC (asset management company) where they invest their money would cancel their SIP in event of failing to pay an SIP installment. However, that is not true. If you are unable to commit to your SIP investments for one or two times, AMCs will not cancel your SIP investments. AMCs would not also levy any penalty or charges on investors for failing to commit to their SIP investments. However, banks might charge you for disgracing your auto-debit payments.
Having said that, an AMC or fund house will cancel your SIP investments if you fail to invest for three consecutive months. This means that there would be no further auto-debit of payments from your bank account and the AMC would stop to invest in mutual funds from your behalf. Note that, when your SIP gets cancelled, it simply means that no further investments would be made in that particular SIP mutual fund. You would not get any money on cancelling your SIP. To get your money, you would need to sell your mutual fund units at the prevailing market price.
As SIPs help to cater to long-term financial goals, cancelling of SIP would have a negative impact on your mutual fund investments and your financial portfolio in general. This could also mean that you would have to delay your financial goals. To avoid such scenarios, several AMCs offer the facility of pause to investors. Pausing the SIP for a few months during a financial crunch or any other calamity would ensure that your SIP does not get cancelled. However, experts often frown upon the idea of pausing or stopping SIP investments and advise to only use this facility in acute emergencies.
As the power of compounding gets interposed when you pause your SIP investments, try to limit this feature as much as you can. Happy investing!