How to Avoid Penalties and Know When to Pause Your SIP

Systematic Investment Plans (SIPs) have rapidly emerged as an entry point for retail investors who want to participate in the stock market by putting aside small fixed deposits. As per industry data, monthly inflows into SIPs recently crossed Rs 13,000 crore, reaching an all-time high.

However, unforeseen circumstances may require an investor to suspend contributions to a SIP for a short period or close the SIP permanently. Changing SIP status without following proper procedures attracts stiff penalties ranging from a fee of Rs 100 for a single violation to cancellation of the placement with a surcharge of 3% for repeated violations.

To protect investors from such penalties and give them the flexibility to modify their SIPs as and when required, leading financial advisors have come up with smart tips on how and when to pause or stop a SIP. Key guidelines include carefully considering the situation for a short-term SIP pause rather than a permanent closure, giving due notice to fund houses and avoiding ad hoc suspension of instalments.

Rules for Suspending SIP Registration

Typically, an investor can temporarily stop SIP payments by “pausing” his registration in writing or through an online request. Most fund houses allow SIP suspension for up to three months, after which payments will automatically resume.

However, if the suspension period exceeds 90 days, the SIP registration will be cancelled. An investor can also close a SIP permanently by submitting a cancellation form. However, this closure should be done at least 15-30 days before the next instalment date. Using a SIP calculator is also a good option.

Penalty for Irregular SIP Payments

Penalty is levied if the SIP cancellation process is not followed properly or if payments fail despite active registration. For example, if a SIP is rejected for two consecutive times, a default fee of ₹100 will be incurred.

If the installment is not paid for three months, the SIP will be cancelled and a penalty of 3% of the SIP amount or ₹300 will be levied. Penalty is also levied if it is terminated without sufficient notice. Therefore, proper announcement is important.

Industry veterans advise investors to consider pausing SIPs instead of closing them abruptly if the required pause period is less than 90 days. Short-term pause in SIPs is required due to reasons like temporary shortage of funds, taking loans where EMI is equal to monthly investment amount, short-term medical needs, travelling abroad etc.

Permanent closure of SIP should be done only in case of occurrence of events with long-term financial impact like job loss, serious illness, retirement, child’s higher education, marriage etc.

How to pause/stop SIP without hassle

Investors need only submit a SIP modification request by filling up the specified form instead of ad-hoc communication. In case of pause, the duration and resumption date should be specified. The SIP closure form requires you to provide the plan/folio details, remaining installments etc.

Investors can also apply for SIP closure hassle-free by logging into their online account on the fund house’s website. The email request should be sent only from the registered email ID. Following the proper procedure will reduce the risk of penalty.

Online mutual fund investment platforms further simplify the process of changing your SIP status temporarily or permanently without any paperwork.

Moreover, a demat account makes it easier to manage your investments including SIPs as all your holdings are consolidated at one place, making tracking and necessary changes easier.

SIP supports financial planning during fluctuations

Stopping SIP temporarily or halting installments depending on the circumstances is not the same as withdrawing from equity investments. SIP enables disciplined investments even during market fluctuations and supports financial planning. You can restart SIP after a break to achieve your long-term goals while leveraging the effect of compounding. Investors should therefore exercise caution while changing their SIP status rather than rushing to abandon their investments.

Investors can easily suspend or terminate their SIP by following a structured procedure and providing necessary notice to avoid penalties. It is advisable to review your life situation periodically to take a prudent decision on continuing, suspending or terminating your SIP. With a little wisdom and planning, you can save on fees while adapting your SIP to your evolving investment needs and financial capabilities. It remains important to stay invested for the long term.