The systematic investment plan (SIP) is a disciplined and convenient investment method that allows investors to make regular contributions to their preferred mutual fund scheme. Despite the simplicity of SIPs, there may be occasions when an investor is unable to make their monthly installment due to insufficient funds. What happens then? And what steps should be taken in such a scenario?
Consequences of missed SIP installments
Missing an SIP installment is a fairly common occurrence, and the ramifications aren’t as dire as one might imagine. The fund house doesn’t penalise you for a missed installment, and contrary to common misconceptions, there are no actions taken by the asset management company (AMC). However, banks may charge a fee for Electronic Clearing Service (ECS) rejection if the investor fails to maintain sufficient funds. It’s crucial to know that if you miss three consecutive installments, the SIP is cancelled.
A single missed payment doesn’t significantly impact your overall investment corpus. It can disrupt the rhythm of cost averaging, a cornerstone principle of SIP investments that allows you to yield returns even in a fluctuating market by leveraging market volatility. Missing installments thus undermine the very purpose of SIPs and inhibit their ability to accumulate long-term wealth.
What should you do?
If you’ve missed a payment due to insufficient funds, it’s vital not to panic. The following steps can guide you on how to navigate this situation:
1. Make Up for the Missed Payment: If you have missed a payment, you can deposit the necessary amount into your bank account before the next SIP date. This helps in maintaining the continuity of your investments and mitigating any potential impact on the overall investment corpus.
2. Stop or Pause the SIP: If you are facing a financial crisis, it is advisable to stop the SIP temporarily or request a pause from the fund house. You can resume it later, when you have adequate funds, without any additional charges. This prevents incurring bank charges for dishonoured payments.
3. Use the SIP Modification Facility: Some mutual funds offer the facility to modify SIP details, including amount, frequency, or date. You can change the SIP date to suit your financial cycle better and avoid any further chances of missing a payment.
4. Regularly Monitor Your Bank Account: Keep a check on your bank account balance around your SIP date to ensure there are sufficient funds to meet the SIP obligation. This can help prevent missing out on installments due to insufficient funds.
5. Keep a Buffer Amount in Your Account: To avoid falling short of funds, it’s a good idea to maintain a buffer amount in your bank account that is slightly more than your SIP installment amount. This ensures that you have enough funds for your SIP, even in the case of unexpected expenses.