Systematic Investment Planning (SIP) allows an investor to make a regular, automated investment into a mutual fund scheme on a pre-determined period (weekly, monthly, quarterly or twice a year).
Investor gives an electronic clearing service (ECS) and National Automated Clearing House (NACH) mandate to the bank so that money can be automatically debited from your account and invested in mutual funds.
However, what could be the implications if such a debit mandate fails due to insufficient funds in the bank account of an investor?
The asset management company (AMC) or fund house will not allot units to the investor due to a lack of funds for the purchase. However, if three consecutive SIP debits are not honoured for lack of sufficient funds, the fund house will cancel the SIP.
Investors who wish to stop or pause SIP should do it manually by revoking the mandate registered through the bank to avoid a penalty in case of a bounce.
Generally, most mutual fund houses do not impose or charge any penalty in case the SIP ECS, authorisation for automatic payment to an AMC, bounces due to insufficient funds in the bank account of investors.
However, banks tend to levy a bank charge due to the dishonour of SIP ECS. Typically, banks charge a penalty every time the SIP auto-pay mandate fails due to insufficient bank balance.
Moreover, closing or cancelling of SIP will not affect the value of the investment. An investor can redeem their investment subject to the terms and conditions of the mutual fund scheme of fund house. An investor can even leave the investment amount untouched and the value of the investment will rise or fall as per the performance of the scheme.
However, instead of cancelling, investors can always initiate a pause on their SIP if required. It can be restarted as and when required in the future.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.