Going Through A Financial Crisis? Here’s Why Pausing SIP Makes Sense…
Jul 24, 2019

Author: Divya Grover

(Image Source: photo created by jcomp - www.freepik.com)

When things are going right in life, it gives us the confidence to make it better by working towards our dreams such as buying a house, car, providing the best education to children, and planning your own retirement. But in reality, life is unpredictable and full of uncertainties. It may throw you a curveball at any moment and everything can go out of balance.

Something similar happened with Mr Sharma and his family. Mr Sharma's son was doing very well at school and he had planned to send him abroad in the future for higher education. He was regularly investing in diversified equity funds through systematic investment plan (SIP) to achieve this financial target.

But soon the company Mr Sharma worked with underwent a financial crunch and many employees, including him, were laid off.

Without regular income, Mr Sharma realised that it would become difficult to meet the necessary expenses as it could be a while before he finds a new job. Nonetheless, he was determined that this setback would not affect his child's future and will continue with his investments. He decided to consult his financial adviser for a solution.

The financial adviser told Mr Sharma to use the money he had saved in a contingency fund to meet the daily expenses and also continue with his investment as far as possible. Further he advised him to use the pause SIP option if the contingency fund is not enough to continue with his investments.

What is Pause SIP?

If for some reasons you are unable to continue with your SIP investment temporarily, many mutual funds offer the option to pause the SIP for a limited period of time. Thus, you don't have to stop the SIP or miss contributions if you are going through financial crisis.

Mutual funds allow investors to pause the SIP for a period of maximum 3-6 months depending on the mutual fund house. To pause the SIP, investors have to fill out a form and mention the start and end date of the pause duration.

The form has to be submitted at least 30 days prior to the SIP date from which the investors wants to pause the investment. This is because it takes time for mutual fund house to send the pause mandate to bank and stop auto debit of funds.

After the pause period your SIP will resume automatically. Most mutual funds allow you to pause the SIP only once during the entire tenure of investment. Please note that SIP pause facility is unavailable to those who have invested through the stock exchange or through an online distributor portal.

The pause facility is not a tool to overcome market volatility; it should be only used to manage liquidity needs when the money tap runs dry. By investing regularly through SIP, regardless of market fluctuations, you ensure that your investments are on the right path to achieve your goals. Additionally, you are protected to some extent against market volatility and benefit from cost averaging and compounding of wealth.

[Read: Why Patience Is The Key To Successful Investing]

Why you should pause SIP instead of missing contributions

Ideally, missing SIP should be avoided as it can hinder the growth of your investment and you may deviate from achieving your target. Missing out on SIP is counter-productive to cost averaging, which works only when you invest regularly.

If you miss an instalment due to insufficient funds, the fund house does not levy any penalty or cancels your portfolio. However, the bank will charge you for the ECS rejection.

If you miss your instalment for three consecutive 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.

[Read: Missed Your SIP Instalment? Here's Why You Should Be Worried About it]

How to make up for paused SIP

When you have sufficient funds, you may opt for the step-up SIP option to increase your monthly instalment and make up for any deficit towards achieving your goals. You may also invest lump sum amount that you may have in liquid funds and start a systematic transfer plan (STP) to transfer funds to the scheme of your choice.

Things you should keep in mind

Unforeseen events like job loss, medical emergency, etc., may arrive at any time and can affect your ability to earn. Maintaining sufficient cash flows to meet unavoidable expenses may become difficult at such times. You can, however, minimise its impact by preparing yourself for a financial crisis. Here's how:

  • Start financial planning as soon as you begin earning

  • Make a budget and stick to it

  • Invest your savings in different asset classes

  • Avoid taking debt

  • Get adequate life and health insurance cover

  • Build an emergency fund worth 12-24 months' expenses and invest it in liquid assets

Editors' note:  Wish to know the best mutual fund schemes to SIP into, ELSS for tax saving this year, and schemes that have the potential to provide BIG gains?

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