What happens if I miss mutual fund SIPs?

Mutual funds investments have become a staple in an investment portfolio for every type of investor. The option to invest in mutual funds through SIPs makes it more convenient even for investors who do not have a bigger corpus and gradually build their wealth. But what if for some reason an investor is not able to meet the SIP obligation? What happens to the mutual fund investment? Does it lapse like missing a premium payment for insurance? The answers to these questions are discussed hereunder. 

Read More: Best apps for SIP investments 

What is SIP?

Let us begin with the basic meaning of a SIP. SIP stands for Systematic Investment Plan. Under this plan, an investor can invest a fixed amount in mutual funds at regular intervals. The investor will have to accept the ECS mandate or the auto-debit mandate in their bank account where the said amount to be invested in the selected fund will be debited from the investor’s bank account on a fixed date at fixed intervals (usually a month). SIPs can be as low as Rs. 100 depending on the fund and can be continued for a fixed time period or for perpetuity. 

Investors also have the option to gradually increase their SIPs with the increase in their income or better market conditions and reduce it as well without any hassles or penalties. Other benefits of investing through SIP mode include stopping the SIPs anytime as per their convenience, getting the benefit of rupee cost averaging, higher compounding benefit, creating a disciplined approach to systematic investing, and gradually building enough corpus for financial security. 

What are the consequences of missing a SIP?

As mentioned above, investors can easily increase, decrease or stop their SIPs at their convenience. However, there may be a case when investors are not able to meet the monthly SIP mandate set by them due to other financial obligations or a shortage of funds. Given below are the consequences of the same.

1. Action by AMCs

If the investors miss the SIP payment for a month, the AMC (Asset Management Company) does not levy any penalty for the same. Missing a SIP payment is usually on account of a lower balance in the bank account that has the mandate for the auto-debit for this SIP. Investors can simply increase the balance in the said account to meet their auto-debit mandate the following month to continue the SIP smoothly without any consequences. 

However, if the investor fails to meet the SIP payments for 3 months consequently, the SIP stands cancelled by the AMC. This provision is in place to protect the interest of the investors against bank charges on account of missing SIP mandates and not maintaining enough balance. The existing investments made till the SIP is cancelled will remain intact and continue to earn returns for the investor. 

2. Action by Bank

The bank account linked to the SIP should have sufficient balance each month to meet the SIP obligation on a timely basis. If the balance is not sufficient, the investor will miss the SIP payment and the bank has the authority to levy a penalty along with bank charges for the offence of dishonour of cheque or auto-debit payments. When the SIPs are missed continuously for more months, the bank charges keep increasing which adds the burden on the investors. As mentioned above, when the SIPS are missed for a continuous period of 3 months, the AMC will cancel the same and the auto-debit facility will no longer be functional. Investors will also have to notify the bank of the cancellation of the SIP mandate. The penalty levied by the bank will depend on the guidelines of the bank. 

What is a better option than missing SIPs?

Missing the auto-debit mandate or dishonour of cheques is a serious punishable offence under Indian laws. Therefore, it is always better to avoid such situations and keep adequate balances in the bank accounts to meet the necessary financial obligations.

 If the investors foresee that they will not be able to meet the SIP mandate in the coming months, it is better to put a pause on such SIPs and continue them at a time when they have sufficient finances to meet future obligations. By putting a timely pause on the SIP auto debit mandate, investors can avoid the default in paying SIPs as well as the penalty levied by the bank for the same. The request to put a pause or stop the SIP can be easily done by contacting the AMC or the broker through their online portal or by filing a physical form regarding the same. Such a request has to be submitted at least 30 days before the SIP is due. 

Conclusion

SIP payments are an easy and convenient way of wealth creation over time and can be started at the earliest to gain maximum advantage. The option to pause the SIPs at any time give the investors an edge over other investment options like PPF where contributions are mandatory for the tenure of the investment. This option is definitely better than missing the SIPs and incurring bank charges for such a default. Moreover, if SIPs are missed for more than 3 months, they stand cancelled by the AMC which results in lower wealth creation than the target set by the investors for their portfolio in the long term.

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