What happens if you miss a SIP Payment in-between?

One of my readers asked an essential question about what he should do as he is more likely to miss the upcoming SIP installment payment.

His question is:

I have a couple of SIPs one in large cap fund and other in mid-cap fund in the HDFC fund house. The money gets deducted automatically from my HDFC bank account on the due dates.

I want to know what happens if there is no fund on the day when my account is auto debited?

Is there anything I should be doing if I won’t be able to pay the next few SIP instalments.

The question is very related to the current COVID-19 situation, and I will like to clarify every aspect of what will happen if you miss the SIP.

From the Perspective of the Investment AMC

Mutual fund investors believe missing a SIP can lead to penalties from the AMC or even a cancellation of future SIPs etc.

However, missing a single SIP doesn’t lead to any penalty or action from the side of the AMC.

As an investor, if you miss the SIP payment, the amount you are to invest in the market skips—the process of investing continues from the next month or whenever the next SIP payment is due.

The AMC will again auto-debit, and if the funds are available, the SIP will continue as have opted initially.

However, if you miss three consecutive SIP installments, the fund house can cancel the SIP. Still, there is no penalty from the AMC.

From the Perspective of the Bank

Though AMC doesn’t have any penalty, the bank may charge a fee to the account holder when there is a default on SIP.

Again, the penalty is due to the failure of not maintaining a sufficient balance for the Electronic Clearing Service (ECS).

So if you miss a SIP, the bank will charge a fee for an ECS rejection. The fees vary considerably from bank to bank and from account type to account type.

The bank considers the SIP request like a cheque and due to insufficient fund treats it as dishonored and charges the account holder for it.

What Should Investors Do?

To avoid such unwanted fees from banks, pause or cancel the SIP from the AMC.

One can resume the SIP later.

Pause and resume of SIP have no additional charges by either the AMC or the bank. However, every fund house doesn’t provide an option for pause. So one has to cancel the SIP now and restart it again.

Remember, it can take up to 10 working days for your online request to pause or stop the SIP. However, for the offline channels the same, it can be as long as 30 days.

However, if you aren’t sure about the use of the AMC interface for pause and resume of SIP, you can even cancel the ECS from the bank as well. AMC will request a payment, but the bank will reject it.

Final Thoughts

Remember, skipping SIP installments will defeat the primary purpose of averaging out the cost.

If you miss a SIP in the bad phase of the market, you lose the opportunity to buy low. Moreover, you may miss the objective of the investment and the planned corpus amount at the end of the tenure.