Think about it. You quit your job without an alternative on hand. Or you get fired. You invest in mutual funds (MF) and your systematic investment plans (SIPs) are going on. But with no job on hand and suddenly no income to fund them, what can you do?
In August 2017, we had told you ways in which you can increase your SIP commitments, if, say, your salary or business income goes up . Last month, we also told you how you can stop or pause your SIPs in case you are facing a temporary cash crunch.
But the question is: Can you reduce your monthly commitments to your SIP? The answer is no.
A Mint reader wrote to us recently that he has decided to quit his job. He has ongoing SIPs in mutual funds up to ₹10,000 but he doesn’t have an alternative job at the moment. He wondered how he would be able to meet his monthly SIP commitments, until he gets a job.
The truth: fund houses do not allow you to reduce your monthly commitments midway in existing SIPs. The easiest way to reduce your monthly SIP commitment is by stopping all or a few of them and re-starting a new one, albeit with a lower amount.
Although SIP registrations have become easier and faster than before, it could take a month to stop your existing SIPs. One reason why fund houses do not allow you to reduce the amounts in existing SIPs is the fear of losing business. While they say it could be misused for flimsy reasons, a big reason is that they pay commissions to distributors in advance. Typically, SIP commissions are paid to distributors when an SIP starts; they’re based on the amount committed to be invested every month and the tenure. Now, if you decide to reduce your SIP amount midway, fund houses face the difficult task of recovering the excess commissions from distributors, something that the fund industry insiders say they would rather avoid.
But technology comes to the rescue sometimes. Online investment platforms such as Fundsindia.com offer the “Flexi SIP” facility to alter your monthly SIP investment amounts. All you have to do is fix the upper and lower limits and a monthly contribution that you are most likely to make. If you wish to reduce your SIP amount, you can do so online. The catch here is that Fundsindia.com does not register your SIP as an SIP in the books of a mutual fund; every monthly investment gets registered as an “additional investment” instead. Hence, the flexibility.
If a mutual fund scheme suddenly decides to stop accepting money (like some mid- and small-cap funds do in rising markets), then Fundsindia.com converts your “Flexi SIP” program into an actual SIP and registers it as one. Your SIP loses its flexibility then.
The best way to overcome the challenge of a job loss is to have a contingency fund. Have about six months of your living expense, including your loan repayments and SIP commitments, in a kitty built through a liquid fund over time. Once this kitty is built, even if you decide to quit your job, you can still continue your SIPs.