SIP: Missing three consecutive installments can ruin all your hard work and lead to multiple losses!
Investing in a Systematic Investment Plan (SIP) is considered the easiest way to build long-term wealth. However, missing three consecutive installments can ruin your hard work and planning. This not only hinders your investment but can also lead to numerous other losses.
A Systematic Investment Plan (SIP) is a popular investment method that allows even small investors to invest regularly in the stock market or mutual funds. It helps you leverage the power of compounding, building a large corpus over the long term. Most people start with a long-term goal in mind because compounding benefits significantly over the long term and helps build a large corpus.
However, you must ensure that you don't miss any installments. Suppose you find yourself in a situation where you don't have enough money left in the bank for your installments, and as a result, you miss a few installments in a row. What will happen? Understand this so you can protect yourself from this loss.
SIP Cancellation
Most asset management companies (AMCs) and banks have a rule that if you miss three consecutive SIP installments, they can cancel your SIP. This can impact your entire investment journey.
Reduced Returns and Loss of Compounding
The biggest benefit of SIPs is compounding. When you invest regularly, your money not only grows but also earns returns on that increased amount. When you miss installments, the compounding chain is broken, and you lose the opportunity to practice rupee-cost averaging based on market movements. This impacts your returns. In such a situation, you may have to make a larger investment in the future to reach your financial goals.
Bank Penalties and Charges
If you miss a SIP installment due to insufficient balance in your bank account, the bank may charge you a penalty for "insufficient funds." This penalty is levied every time an installment is missed and becomes an unwanted expense for you. Furthermore, if auto-debit repeatedly fails due to a lack of funds, the bank may view it as non-maintenance. This can also negatively impact your credit score.
How to Avoid Missing SIP Installments?
1. Maintain a Sufficient Bank Balance
The most important thing is to always maintain a sufficient balance in the account from which your SIP installment is deducted. Make it a habit to check your bank balance a few days before your SIP date.
2. Set Automatic Reminders
Set automatic reminders for your SIP date on your phone or calendar. This will remind you that money will be deducted and help you maintain a balance in your account.
3. Determine the SIP amount based on your income
Decide your SIP amount only after accurately estimating your income and expenses. Avoid having an excessive amount, which can cause financial problems later.
4. Keep a backup account
If possible, keep a backup bank account for your SIP. Some banks or investment platforms allow you to link SIPs to multiple bank accounts.
5. Keep reviewing your financial situation
Review your financial situation periodically. If your income changes, adjust your SIP amount accordingly. You can increase or decrease it.
6. Skip or Pause Facility
If you feel your financial situation will be unstable for some time and you will face difficulty paying your SIP installments, you can take advantage of the SIP Pause feature. This allows you to pause your SIP for up to 6 months and then resume it again. Using this feature does not stop your SIP.
What to do if you miss an installment?
Contact the Fund House
If you miss a SIP installment for some reason, don't panic. Contact your asset management company (AMC) or the distributor from whom you took the SIP. Find out if there's a way to manually deposit a missed installment. In some cases, they may allow you to do so. If your SIP is about to be cancelled, the fund house may offer this option.
Adjust the SIP Amount
If you feel your current SIP amount is too high for you, you may want to consider reducing it. Remember, a lower SIP amount is better than no SIP at all.
Be Prepared for the Next Instalment
Ensure you have sufficient balance in your bank account on the next instalment date to ensure proper auto-debit. To do this, check your account balance two days before the instalment date to eliminate any potential errors.
How to Recover Missed Instalments
Make a Lump Sum Investment: You can deposit the missed amount at once to ensure compounding continues.
Top-Up SIP: Increase your investment amount slightly for the next few months.
Rebalance: Create a new strategy based on your financial goals.
FAQs
What happens if you miss a SIP installment?
If you miss a SIP installment, the bank may impose a penalty for insufficient funds, and missing three consecutive installments may result in the SIP being cancelled.
What happens if you miss three consecutive SIP installments?
In most cases, your SIP is cancelled by the AMC after missing three consecutive SIP installments.
How does missing a SIP affect your returns?
Missing a SIP reduces the benefits of compounding, which can reduce your expected returns and delay your financial goals.
How can you avoid missing a SIP installment?
To avoid missing a SIP installment, maintain a sufficient balance in your bank account, set reminders, and adjust your SIP amount based on your income.
