Systematic investment plans (SIPs) have emerged as a popular means to invest in mutual funds, especially equity funds. In November 2022, a sum of Rs 13,306 crore was invested through 6.04 crore SIP accounts in various mutual funds schemes. While it is a significant number, many investors see their investment plans suffer when some of their SIP mandates do not go through due to insufficient funds in the bank account.
Most investors look at SIP as a tool to invest for the long term and build wealth over a long period of time. However, there are situations which lead to cancellations of the SIP. The reasons could be loss of income, poor performance of schemes and changed financial goals among others.
When the fund house presents the SIP debit mandate to the bank of the investor, the funds get transferred from the bank account of the investor to the bank account of the mutual fund house. However, when such debit mandates fail due to a lack of sufficient funds in the bank account of the investor, the units are not allotted to the investor. It is an industry-wide practice that if three consecutive SIP debits are not honoured due to a lack of sufficient funds, then the SIP stands cancelled. In a recent addendum issued by PGIM India Mutual Fund, the fund house made it clear that four consecutive failures of SIP due to a lack of funds in the bank account of the investor will lead to SIP cancellation.
“Earlier the SIP used to get cancelled after three continuous dishonours, which has been now revised to four. This is more favourable to the investor as it gives the investor one additional month,” said a spokesperson from PGIM India Mutual Fund.
SIP debit failures
When a SIP does not go through due to a lack of funds, the investor cannot go back to the fund house and ask them to reinitiate the debit for that month.
“If the debit mandate does not go through because the bank account is closed by the investor, then we initiate SIP cancellation immediately and do not wait for more debit mandate failures,” said a senior official with a leading fund house who is not allowed to speak with the media. “If the debit mandate does not go through because of a temporary technical issue at the bank or payment aggregator level, then the debit is attempted on the following business day after the issue is resolved,” he added.
The fund house does not charge any penalty if the SIP mandate fails due to lack of funds. But the bank in which the investor has the saving account can charge a stipulated penalty for every such instance. The amount may vary from bank to bank.
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Do SIPs work?
Investments in SIP can reward you if and only if you remain invested for an entire market cycle. According to the mutual fund industry data, about 47 percent of the SIP AUM is from SIPs that have run for more than three years and 23 percent of the SIP AUM from SIPs that have run for more than five years.
Many times investors keep thinking whether it is a good time to start SIP and sometimes they simply procrastinate thinking that there are no adequate funds to start with. However, smart investors acknowledge that over the long term, equity as an asset class rewards investors who have been consistent with their investments.
A study conducted by White Oak Mutual Fund showed that over 26 years ended September 2022, for regular monthly investments in the BSE Sensex for 10-year periods, the average returns were in the range of 15.71 percent to 15.8 percent, for dates ranging between 1 and 28 for the month. Simply put, consistent investors make handsome money if they have a long enough view on the asset class, irrespective of the timing.
“Investments made in equity funds through SIP over a five-to-seven-year period tend to reward investors. Timing the market is subject to luck and impossible to predict. SIP, which ensures discipline and consistency in approach, often ends up being the winning strategy,” says Anthony Heredia, MD & CEO, Mahindra Manulife Mutual Fund.
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What should you do?
Investing for the long term makes more sense, though most investors suffer from various behaviour biases.
“Many investors like to chase returns. Such investors start SIPs when the past returns look good and tend to walk out if they see losses on their SIPs in the short term,” says Anup Bhaiya, founder and managing director, Money Honey Financial Services. Investors should never treat SIP as a ‘no loss’ tool to invest in equities. The only way to overcome losses and create wealth is to give your money long enough time to compound, he added.
Ravi Kumar TV, founder of Gaining Ground Investment Services, is of the opinion that the investors end up comparing their SIP performance in the short term with that of other assets, which sometimes makes them exit if they see poor numbers.
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Investors have to be patient and keep adding more money to equity investments in a staggered manner.
“Investors need to review their financial goals and their investment plans at regular intervals. In line with increased income, investors should increase their SIP amounts. That helps in sizeable corpus creation in the long term,” says Kumar.