If you face financial difficulties and are unable to continue paying your SIP (Systematic Investment Plan) installments, don’t worry. Mutual funds are flexible long-term investment tools, and missing a few installments is not penalised by fund houses. However, if you skip payments for three consecutive months, your SIP will be automatically canceled. Additionally, your bank may charge a penalty for missed auto-debit transactions. To avoid this, consider sending a "Stop SIP" request at least 30 days in advance, either online or through an offline form, to pause your SIP without penalties.
However, several internal and external factors may change your mind set about continuing your SIP, and you may want to stop your SIP payments. But what happens if you stop paying SIP? This article will help you find the answer to what happens if I stop paying my SIP and what consequences can follow.
What does ‘SIP stop’ do?
‘SIP stop’ is a term used in the SIP investment ecosystem that describes the situation when an existing investor investing in mutual funds through SIPs stops the regular payments and discontinues further investment in the mutual fund scheme. Opting for ‘SIP Stop’ gives a formal request to the mutual fund house to not deduct any further SIP amount from the investor’s bank account. ‘Stop SIP’ indicates that the mutual fund units held by the investors may be redeemed as per the policies of the mutual fund house, and the redeemed funds must be deposited as a lump sum directly into the investor's bank account. Since auto deduction of funds stops after the ‘SIP Stop’ order, no mutual fund units are purchased further, and the SIP account stops functioning.
Can a stopped SIP be restarted in the future?
One of the most common confusions about what happens if you stop paying SIP is if it can be started again after a specific time. When you stop your SIP payments in a specific mutual fund scheme, it doesn’t mean that you cannot start a SIP again in the same mutual fund scheme. As the mutual fund scheme continues to be available for investors to invest through SIPs, you can easily restart it at a later date in the future. Most mutual fund companies allow investors who have stopped a particular SIP to invest in it again at their convenience.
You can contact the mutual fund house by visiting its website or contacting its customer case to restart your SIP. The process generally includes filling out a SIP form, which contains information such as the mutual fund scheme, SIP amount, SIP date, bank account details, etc. Once you fill out the form with all the required details, the mutual fund house will review your form and resume your SIP as per the new instructions provided in the SIP form.
Does a SIP-stop bring any charges or penalties on the investor?
No, there are no charges or penalties levied by mutual fund houses against investors for stopping their SIPs. However, there are a few charges you may incur as per your decision after stopping the SIP:
Exit load: If you redeem your mutual fund units shortly after stopping your SIP, you might have to pay an exit load. Exit load is a charge levied by mutual fund houses on investors for redeeming the mutual fund units earlier than the pre-decided time.
Minimum investment requirements: Some mutual fund schemes have a minimum investment requirement, which requires investors to invest a specific amount before being allowed to redeem the units. If stopping your SIP causes your investment to fall below the minimum required amount, you may face penalties.
Does SIP stop automatically redeem the invested amount?
Redeeming the mutual fund units or redeeming the invested amount is a process where investors give a formal order to the mutual fund house to sell the mutual fund units held by the investors and deposit the current investment value amount to their bank accounts. Redemption of mutual fund units is the final step in the SIP account closure, and the investor ceases to be a SIP investor in the mutual fund scheme.
However, stopping the SIP through ‘SIP Stop’ does not mean that the mutual fund units will be redeemed and the SIP account will be closed. ‘SIP Stop’ is only a formal order to the mutual fund house to either pause or stop any further SIP amount deduction from the investor’s bank account for the foreseeable future. ‘SIP Stop’ does not result in the redemption of mutual fund units until the investor officially communicates to the mutual fund house to redeem the mutual fund units and close the SIP account. Investors stopping their SIPs can easily resume their SIP payments again in the future without redeeming the mutual fund units unless officially specified.
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Five reasons why investors pause or stop SIPs midway
Here are the top five reasons that may change the mindset of investors and make them pause or stop SIPs midway:
1. Financial emergencies
You may have started your SIP by deciding your SIP amount many years ago, but it is possible that you have experienced an unexpected financial emergency, making it difficult to continue paying the SIP amount. Most investors stop or pause their SIPs in case of financial emergencies as they feel that they can use the SIP amount to avoid a personal financial burden. Once their financial condition becomes stable, they resume the SIP payments.
2. Market volatility
Similar to other investment instruments, mutual fund schemes are also affected by market factors, which can create volatility and force your investment value to fall. In such a case, when the mutual fund scheme investors are investing in through a SIP starts to show a bearish trend, inventors can choose to pause or stop the SIP investments to ensure they don’t invest in an unfavourable market. Once the volatility stabilises, they can resume the SIP investment.
3. Shift in financial goals
Financial goals change over time, and you may need more money to cover personal expenses. For example, you may have started a SIP when you were single, but after marriage and having children, you may find it difficult to pay the SIP amount regularly due to extra expenses. In such a case, you may stop your SIP to ensure that you can use the saved SIP amount to cover the extra expenses.
4. Shortage of funds
Financial situations change over time, which may leave an investor with a shortage of funds. For example, you may have to pay for your child’s education or marriage, which requires a high lump sum amount,, leaving you with low funds. You may feel that continuing SIP may leave you with lower cash in hand, resulting in the closure or pausing of the SIP.
5. Underperformance of funds
Mutual fund schemes are subject to market risk and may underperform for various technical and fundamental reasons. You may find that a mutual fund scheme that was performing well is now underperforming and may lower your investment value. In such a case, you may stop your SIP and choose a better-performing mutual fund scheme.
Negative impacts of temporarily stopping your SIP
Although stopping your SIP may have a justified reason, it doesn’t mean that you won’t be negatively impacted. Here are the negative impacts of temporarily stopping your SIP:
Financial indiscipline: Most investors choose SIPs to invest in mutual funds to create financial discipline, as they don’t have to manually save and invest the amount in mutual fund schemes. However, stopping or pausing SIPs may result in financial indiscipline, as you may find it difficult to save and invest manually, hurting your overall financial goals.
Losing compounding benefits: One of the best features of mutual funds is the compounding effects that significantly multiply the returns by adding the interest back to the previous principal amount. Once you stop or pause your SIP, the compounding effect stops, making your investment lose compounding benefits.
Delay in achieving financial goals: Consistent investments based on a specific investment strategy are crucial for achieving financial goals, such as buying a house or funding education within a specific time frame. Stopping your SIP can delay achieving these goals as your investments' expected growth slows down.
Emotional impact: SIPs create a positive emotional and psychological impact as they bring a sense of progress towards financial objectives. Stopping or pausing SIPs can interrupt the achievement of financial goals, creating negative emotional and psychological impact. It may also cause you to second-guess your investment decisions, leading to a lack of confidence in your financial plan.
What happens with the already invested amount after stopping SIP?
When you invest a specific amount through SIP in a mutual fund scheme, the fund house buys mutual fund units equalling the invested amount. However, when you pause or stop your SIP, no new mutual fund units are allotted. However, the existing mutual fund units which were allotted based on the previously invested amount, remain invested and their value keeps on performing as per the securities included in the mutual fund scheme.
Here is an example for a better understanding:
An investor started a SIP of Rs. 8,000 per month in an equity fund in October 2016 and continued it until October 2018. Over this period, the investor made regular monthly investments for 24 months, contributing a total of Rs. 1,92,000 to the scheme. Throughout this time, the fund's NAV (Net Asset Value) varied each month, resulting in the allotment of different units each time the SIP amount was invested.
By the end of the SIP period in October 2018, the investor had accumulated a total of 7,850.250 units in the scheme. After stopping the SIP, these units remained invested in the equity fund, and their value continued to fluctuate based on the performance of the fund's underlying securities.
How to prevent missing your mutual fund SIP?
To avoid missing your mutual fund SIP payments, here are a few proactive steps you can take:
- Set Up Auto-Debit: Ensure your SIPs are linked to your bank account via an automatic debit mandate. This way, your installments are deducted automatically each month.
- Maintain Sufficient Balance: Regularly check your account balance to ensure there’s enough money for the SIP deduction on the due date.
- Opt for Smaller SIP Amounts: If you’re concerned about cash flow, reduce the SIP amount to a manageable level instead of discontinuing it.
- Monitor Payment Dates: Keep track of SIP deduction dates and align them with salary credits or other regular income inflows to avoid any shortfall.
- Request a Pause: If facing a temporary financial crunch, some mutual funds allow you to pause your SIP instead of canceling it altogether. This helps maintain your long-term investment without losing track of your goals.
- Use SIP Top-up Option: If your income fluctuates, consider setting a lower SIP amount and using the top-up facility when you have surplus cash. This way, you can avoid defaulting during lean months.
By implementing these strategies, you can ensure that you stay consistent with your SIP investments and continue to build wealth for the future.
Key takeaways
‘SIP stop’ is a term used to refer to the situation when an existing mutual fund investor stops or pauses the SIP payments for a foreseeable future.
Stopping or pausing SIP does not mean the redemption of the existing mutual fund units. The units already allotted remain invested in the mutual fund scheme and continue to grow or decline based on the market performance.
Investors can stop or pause an SIP by submitting a formal request to the mutual fund house and can resume investing after submitting a SIP form.
Investors may stop or pause SIPs for reasons such as financial emergencies, mutual fund underperformance, volatility, etc.
Conclusion
Systematic Investment Plans (SIP) are ideal options for investing in mutual funds in India. They provide a systematic way to invest, creating an investment discipline to better achieve investment goals. However, as life is uncertain, you may end up stopping or pausing your SIP payments due to financial emergencies or a shortage of funds. Furthermore, market factors such as mutual fund underperformance and market volatility can also force you to stop or pause your mutual fund investments. However, if you do not redeem your mutual fund units, they continue to perform as per the performance of the securities included in the mutual funds. You can also resume your SIP investments easily in the future.
Now that you know what happens if I stop paying my SIP, you can have a better approach while considering stopping or pausing your SIPs.