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Facing A Crunch? Here's How You Can Pause A SIP... - Outside View by PersonalFN
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Facing A Crunch? Here's How You Can Pause A SIP...
Mar 31, 2017

Raj has invested in mutual funds through a Systematic Investment Plan for a premium of approximately Rs 30,000 every month. Their long-term goal is to buy a house and began their financial journey of investing in mutual funds through monthly SIPs.

He and his wife Sheetal had a medical emergency, leading to unexpected expenses this month. They are worried about being able to afford the SIP payment.

Have you been in the similar situation, where, due to a cash crunch you consider pausing your SIP? or Do you feel the stress of regularly investing in a Systematic Investment Plan?

Systematic Investment Plan

A SIP is a mode of investment where you, the investor, invests a pre-determined amount on a monthly basis, on a pre-determined date, into a particular mutual fund scheme. It's the most commonly chosen method of investing by retail investors today. This in turn helps you achieve the long-term financial goals of life, viz. buying a dream home, a car, for your children's future, planning a foreign vacation with family, and even your own retirement. The basic idea of a SIP is it inculcates a habit of saving regularly to achieve financial freedom.

Like everyone else, Raj and Sheetal decided to stop their SIP payments during a cash crunch and later will start a new SIP, during high financial surplus. But this meant additional paperwork they would have to follow again.

Instead of instructing the fund house to cancel their payments, SIP pause is a better approach and it works best for Raj & Sheetal in this situation.

SIP Pause

The advantage of SIP pause allows the investors to stop an existing SIP plan for a period of 1 to 3 months.

In other words, if you are in financial distress and SIP payments will restrain your budget in a particular month, you can pause your SIP plan for a while and resume once normalcy returns.

A short-term crunch should not be a cause of worry. It should not stop you from attaining the financial freedom. But you too, ought to proactively ensure, that you aren't jeopardising your long-term financial wellbeing.

Here are steps to pause SIP...

The procedure is very simple and easy...

  1. Submit the pause form to the AMC and send an instruction. The form can be downloaded from the AMC website or sourced from the Investor Service Centre.
  2. Submit a Bank Mandate.

Once the form is submitted, do not forget to instruct your bank to stop the auto debit service or stop the post-dated cheque. If you miss out on the bank's mandate, they might charge you for dishonour of payment.

Once your pause period is over, ideally, you should resume your SIP.

However, you need to keep in mind that not all fund houses provide the Pause-a-SIP facility. Therefore, it is best to check whether the option is available at the time of registration. Also, you need to bear one thing in mind, this can happen only once in the whole tenure of your investment.

Remember, there are advantages of SIPs...

A SIP effectively stops you from trying to time the market and inculcates automatic financial discipline into your investing method.

You don't need a large amount of money to start an SIP, you can start with as little as Rs. 500 per month and slowly build up your wealth.

Since you're buying every month, you'll be buying at dips and rises, so you are averaging your cost over the time period.

To sum-up...

Although pausing a SIP, gives the investor suppleness to sail through turbulence, one should avoid pausing (or even cancellations of) a SIP; because it hinders the path to wealth creation and accomplishing your financial goals.

Instead appoint a Certified Financial Guardian who will handhold you and plan out your investments and counsel you during difficult times.

Moreover, the key is to stay disciplined and focussed towards achieving your goals. Therefore, it is important to budget your expenses in advance. Along with that you need to maintain some amount as a contingency fund, which can act as a protective shield in times of emergency.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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