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Arpita, a millennial investor, has been investing ₹8,000 per month in three mutual fund systematic investment plan (SIP) schemes over the last two years for her. wedding expenses. But she has been unable to maintain the required balance in her bank account the last two months due to some financial challenges. This has led to the bouncing of her SIP ECS mandate.
Arpita is not alone. With the lockdown and the consequent business loss resulting in layoffs and pay-cuts across industries, many broking companies are now witnessing increasing instances of bouncing of SIP mandates due to insufficient funds in bank accounts.
“We are seeing a lot more bouncing of mutual fund SIP mandates. Prior to Covid-19, the bounce rate used to be 1-1.5 per cent, but in April and May we have seen the bounce rate go up to 10 per cent due to insufficient funds, which is a worrying trend,” said Jimeet Modi, founder and CEO of SAMCO Securities.
Harsha Upadhyaya, CIO-Equities of Kotak Mutual Fund, said, “If you look at the data in March, the peak monthly inflow to the industry through the SIP route was around ₹8,600 crore. For the month of May, it dropped to about ₹8,100 crore.”
“But we cannot confirm if this drop in inflow is because of bouncing of SIP mandates, or active closure/pause by SIP investors. It could be a combination of all of these,” Upadhyaya added.
Avail the pause facility
Mutual fund AMCs, investment advisors and broking platforms say that investors passing through a financial crunch need not let their ECS mandates bounce due to lack of funds; instead they can opt for the ‘SIP pause’ facility till their financial condition improves.
“If there is a job-loss or loss of income, then there is no other go but to cancel the SIP. But if an investor feels that a particular loss of income is temporary in nature, then he/she should opt for the ‘SIP pause’ facility, instead of cancelling the SIP altogether,” said Renjith RG, Associate Director of Geojit Financial Services.
The pause facility allows investors to halt their SIP instalments for a certain period of time and resume them after the pause-period without having to pay any charges.
“It is always better to pause the SIP than cancel it, because it is easy to reactivate a paused SIP,” Renjith said, adding, “If SIPs are cancelled, then the investor has to once again go through the whole process of creating an ECS mandate, certification from the bank, etc.”
SIP pause facility
Several AMCs and broking platforms have started to offer the ‘SIP pause’ facility to investors in recent times. AMCs which offer this facility include Kotak Mutual Fund, Nippon India Mutual Fund, L&T Mutual Fund, Edelweiss Mutual Fund and DSP Mutual Fund.
“Just like any other EMI, if an SIP instalment is missed, then banks impose bouncing charges on the customers. It’s a double whammy ― on one side people don’t have money to pay their SIP, while on the other, the charge for bouncing keeps accumulating when the SIP mandates are missed,” said Omkeshwar Singh, Head-Rank MF, Samco Securities.
“Earlier, there was no SIP pause facility. So, you had to completely stop the SIP and start again. But now, people who are thinking of stopping their SIPs due to lack of funds can pause the SIPs for a few months and restart once they are comfortable financially,” Singh added.
From June 1, the BSE also introduced the SIP pause facility on its mutual fund distribution platform to help cash-strapped investors in the wake of the pandemic and the lockdown.
Remain connected
“The idea of the ‘SIP pause’ facility is to keep investors associated with the mutual fund industry because once they stop the EMI, they may completely discontinue it,” Kotak Mutual Fund’s Upadhyaya said.
He added that there is no additional cost in pausing an SIP and investors can use this facility till they have further clarity on their financial condition.
The tenor of the pause facility varies from a minimum of one month to a maximum of six months depending on the AMC.
Geojit’s Renjith said certain AMCs are offering the pause facility twice, which means an investor can pause the SIP for a period of one to six months and again pause it if things have not improved. He added that an investor should submit the pause request at least 10 days before the SIP due date.
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