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Missed Your SIP Instalment? Here's Why You Should Be Worried About it
Apr 5, 2019

After a recent family get-together, two cousins, Tanmay and Chinmay, stayed over to discuss SIP investments.

Last year Tanmay had started his monthly SIP instalments via the direct route for a short-term goal of three years. Chinmay wasn't sure about starting a SIP or investing a lump sum for three years.

Tanmay: 'Well, this month my salary was delayed, and I missed my SIP instalment. My bank informed me about the penalty charges. What happens if I miss my SIP instalments?'

I explained Tanmay that, when you miss a SIP Instalment due to insufficient balance...

  • For a month then the fund house doesn't levy any penalty and cancels your SIP folio, but the bank charges you (the penalty amount differs from bank to bank) for Electronic Clearing Services (ECS) rejection. Besides, if you miss out on paying one month's instalment, you cannot buy more units next month at the same price prevalent in the previous month.
  • For consecutive three months, the AMC will cancel your SIP and bank charges will be levied for not having enough cash for the ECS. You will have to initiate certain steps to continue your SIP in the same fund.
  • I even explained Tanmay that, 'missing out on SIP instalments can be a deterrent to achieving your financial goals. You can prevent missing your payments:

  • By registering your email address and phone number to get updates on your date of SIP instalments. This way you will avoid the unnecessary penalties and charges imposed by your bank for having insufficient funds to get through the auto debited transactions.
  • Choosing a SIP date closer to your salary date so that you don't face a cash crunch.

In case you encounter a financial crisis and are unable to pay your SIP instalments for a few months, you can request the AMCs to pause your SIP instalments. Most of the AMCs do allow you to discontinue your SIP payments for a period ranging from 3 to 6 months, and this will also prevent bank penalties.

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[Read: 5 SIP Features That Every Mutual Fund Investor Should Know]

Tanmay thanked me and said, 'Now I will never miss SIP instalments!'

Chinmay: 'I wasn't aware of all this. Aditi can you educate more on SIPs?'

I replied in the affirmative...

SIP or Systematic Investment Plan is a way to invest so you can accumulate wealth long-term. It is a mode of investing regularly in mutual funds. It is a disciplined way of making investments in mutual funds. The method of investing is like investing in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money regularly (into your RD account).

A SIP includes a series of consecutive payments of pre-determined amounts made after a defined period. It can be weekly, monthly, quarterly or even yearly. This is a hassle-free way to invest in mutual funds and develop a regular savings habit.

With the SIP mode of investment, your money is deployed in a mutual fund scheme (equity schemes and/ or debt schemes). But your investments are subject to market risk.

All you need to do is select a scheme, define a regular investment amount, pick a date for the monthly deductions, and set the tenure. This can range from 6 months to perpetuity depending on the SIP instalment amount. Once set up, the AMC automatically deducts the monthly payment from your bank account and invests it in the scheme.

'What works better - Lump sum investment or SIP?', asked Chinmay.

I explained further 'to build wealth systematically and to accomplish long-term goals, SIPs work better. The rupee-cost averaging feature of SIPs helps you mitigate market volatility while you endeavour to compound wealth.'

Under rupee-cost averaging, when the market goes up, you buy lower mutual fund units. If the market dips, a higher number of units will be bought. I pulled out a sheet of paper and pen and went on to explain Chinmay further.

Consider this, you invest Rs 1,000 every month for the next 12 months in a mutual fund with a starting NAV of Rs 100. Over the course of the year, the NAV of the scheme dips by 10% to Rs 90, soon there is an uptrend in markets then the NAV ends up at Rs 110 at the end of the 12 months. A simple calculation reveals that the NAV of the fund has grown by 10% in one year. How much has the investment through the SIP grown?

Table: Here's how rupee-cost averaging works
Month NAV (Rs) Units Purchased Via SIP
1 100.00 10.00
2 105.00 9.52
3 103.00 9.71
4 100.00 10.00
5 97.00 10.31
6 98.00 10.20
7 95.00 10.53
8 90.00 11.11
9 95.00 10.53
10 99.00 10.10
11 100.00 10.00
12 110.00 9.09
Total Units 121.10
Final Value Rs 13321.17
Data only for illustrative purposes
(Source: PersonalFN Research)

Over the 12-month period, you invested Rs 12,000 and in turn picked up 121.10 units. At the end of the year, these units are worth Rs 13,321 (NAV Rs 110*121.10 units). The gains work out to 11% ([13321-12000]/12000). During downfall in the markets, you were able to average out your initial investment cost. In this example, the average NAV cost works out to Rs 99.33.

Thus, even though the market had dipped significantly, it averaged out your costs and benefited from returns as soon as the market moved up.

[Read: Can SIP Be Regarded As A Safe Investment Plan?]

Hence, it is always beneficial to start a SIP with the primary aim to build wealth and mitigate the volatility while the markets will continue to remain volatile depicting its integral nature.

So, broadly, with SIPs timing the market becomes irrelevant. What matters is "time in the market" and not "timing the market", as the latter could prove hazardous to your wealth and health.

[Read: Best SIPs To Invest in 2019]

Remember, SIP is only a method of investing in mutual funds. To support this investment method, you also need to pick the right mutual funds that can help you achieve your financial goals. So, make prudent investment decisions to gain the most from your investments.

PS: If you aren't sure about which mutual funds to SIP into, don't worry! PersonalFN is offering you three premium reports that cost less than your favourite copy.

These research reports will provide you superlative guidance to select worthy mutual fund schemes to SIP, the ones that have the potential to provide BIG gains, and the ones for your tax planning this year. Click here for PersonalFN's recommendation and subscribe now.

Author: Aditi Murkute

This article first appeared on PersonalFN here.

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


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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