Charges of SIP rejection due to low balance

SIPs have become the most popular way of investing in mutual funds. Lakhs of investors are pouring in thousands of crores of rupees in mutual funds via the SIP route. SIPs are easy to maintain and bring a sense of financial discipline in the life of an investor. SIPs also automate the process of wealth building and cost averaging by investing amounts at all market levels. Perhaps that's why SIP is called a good EMI.



But, do you know that your SIP has a cost attached to it? A lot of people think that they can skip their SIP payments by reducing the balance in their accounts just before the SIP date. Usually, this is done in months of low liquidity and high expenses. Some people maintain separate accounts for investment purposes and simply fail to deposit the money before the due date. As the SIP bounces the mutual fund doesn't allot the investor any units for the particular rejection because the fund hasn't received the money. However, the mutual fund doesn't penalize you for such default as an SIP is just a convenient option given to you so that you don't have to give a cheque to your distributor every month and money debit is automated. Also, SIP isn't a loan EMI where you have to pay back your borrowings. This is a pure investment tool and hence the mutual funds have no right to charge any levies for the rejection.

However, one still has to be very careful while thinking of letting the SIP bounce. Although the mutual fund won't charge you anything but your bank may charge you for Electronic Clearing Service (ECS) rejection. For a bank an SIP is nothing but a standing instruction issued by you to the bank to debit the amount per month on a specified date just like you may automate your loan EMI or credit card payments. So, on the date of SIP when the transaction gets rejected the bank charges you for that rejection just like the bank charges you for cheque bounce. 

Different banks have different charges for ECS bounce and they can be really hefty (ranging from Rs. 150 - Rs. 1000 or even more). Not only this, these charges keep on accumulating. So, if your SIP gets rejected five times (post which majority of the SIPs automatically get discontinued,) and you deposit Rs. 10,000 in your bank, chances are there that a majority of this amount will be debited because of the negative balance in your account. A few banks offer waiver of such charges on the personal request of the customer but the same is only on a case to case basis.

But there has to be some alternative for days when you just can't arrange for the money. There are two ways out:

  • SIP Pause - Mutual Funds offer you the option to pause SIP for a few months. So, if you are foreseeing a period of increased expenses then you can exercise this facility for the specified number of months. The SIP will commence automatically post the expiry of the pause period.
  • SIP equivalent redemption - In case you are just 4-5 days away from your SIP date then the pause may not happen. In this case to avoid charges you can redeem from your existing mutual fund corpus and let that money be reinvested in the form of SIP. This method is beneficial for units not currently lying in the exit load period. However, this method should be used only in extreme emergencies as regular use of the same will hamper the corpus building process.
To sum it up, mutual funds don't charge you for SIP rejection but your bank may do so. So it is advisable to choose such an SIP amount which you can conveniently take out every month. In case of financial emergencies take help of SIP pause or withdrawing the SIP equivalent but do avoid the charges of SIP rejection. Also, check with your bank for the ECS reversal charges levied in your specific account category.

By the way do you have an idea as to what is the effect of SIP bounce on your CIBIL score? Not sure? Then follow the link below to read our post on the same.
https://finriseinvestment.blogspot.com/2020/06/does-sip-bounce-affect-your-cibil-score.html

Keep following for more updates!

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