As an investor, you have started a systematic investment plan or SIP in a mutual fund scheme to meet your long-term financial goals. However, due to some unavoidable circumstances, you may have to stop or discontinue your SIP. This can happen due to job loss, pay cuts or any other financial emergency.
When an SIP is stopped, it does not mean your invested money is withdrawn, or the units are redeemed. Your existing investment remains invested in the fund and continues to generate returns based on the fund’s performance.
Consequences of stopping an SIP prematurely
If you stop your SIP prematurely in a mutual fund scheme, there are several consequences to be aware of:
Fees and charges
When you start a systematic investment plan, the fund house charges an initial fee, which is amortised over the total SIP tenure. If you stop the SIP midway, you lose the benefit of amortisation and could pay a higher fees effective rate. The fund house may also levy an exit load for stopping the SIP before the minimum period.
Loss of compounding benefits
The main benefit of an SIP is the power of compounding over long tenures. When you stop the SIP early, you lose out on the compounding impact for the remaining period. This can significantly impact the final corpus accumulated.
Need to restart SIP
If you stop the SIP to resume it later, you will have to go through the paperwork and pay the initial fees again to restart it. This can be avoided by continuing the SIP without interruption.
Impact on investment strategy
SIPs are meant to achieve long-term financial goals. When you stop an SIP prematurely, it impacts your investment strategy and time horizon. You may have to re-work your financial plan to achieve the goals still.
Alternatives to stopping an SIP entirely
When stopping an SIP in an equity mutual fund scheme, there are a few alternatives to consider before ending contributions entirely.
Reduce the SIP amount
Reducing the amount is an option if affording the current SIP amount has become difficult. Regularly contributing a smaller amount will allow your money to remain invested and continue generating returns through compounding interest. Over time, you can increase the amount again as your situation improves.
Pause the SIP temporarily
Most mutual fund companies can place an SIP for 3-6 months. This allows you to take a break from contributing new money while keeping your existing investment intact. You can restart regular contributions once your situation stabilises. Be aware that pausing for too long may cause you to miss out on potential market gains and the benefits of rupee cost averaging.
Change the investment option
If the fund you are invested in is underperforming or no longer meets your needs, switch to a different fund option within the same mutual fund company. Your money will be transferred without penalty, and you can choose a fund with an investment style and risk level better suited to your current situation. You continue contributing to the new fund with the same SIP to keep your money working for you.
To wrap up
Stopping SIP mutual fund is a decision that requires careful consideration of your financial circumstances and goals. Think through all options carefully and choose the path that will put you in the best position to achieve what matters most.
