Mutual Fund Houses Can not Reduce SIP Amount Halfway

One of the reasons why fund houses do not allow you to reduce the amounts in existing SIPs is the fear of losing business.Photo: iStock

Think about it. quit your job without an alternative, or you are fired, you invest in mutual funds (MF) and your systematic investment plans (SIP) are underway, but without work and without any income to finance them, that can you do?

In August 2017, we explained how to increase your SIP commitments if, say, your salary or business income increased. Last month, we also explained how you can stop or suspend your job. SIP in case you are facing a temporary cash crisis.

But the question is: Can you reduce your monthly commitments to your SIP? The answer is no.

A reader Mint recently wrote to us that he decided to quit his job, he has PSS going on in mutual funds up to ₹ 10,000, but it does not have alternative employment at the moment. He wondered how he would be able to meet his monthly SIP commitments, until he got a job.

The Truth: Fund Houses do not allow you to reduce your monthly commitments halfway through existing SIPs. The easiest way to reduce your monthly SIP commitment is to stop all or part of them and restart a new one, but with a lower amount.

Although SIP registrations have become simpler and faster than before, it may take a month to shut down your existing SIPs. One reason that fund houses do not allow you to reduce amounts in existing SAPs is the fear of losing business. Although they say that it could be misused for light reasons, a big reason is that they pay commissions to distributors in advance. Generally, SIP commissions are paid to distributors when starting a SIP; they are based on the amount committed to invest each month and the mandate. Now, if you decide to reduce your SIP amount halfway, the fund houses are facing the difficult task of recovering excess commissions from distributors, something that fund industry insiders say that's right. they prefer to avoid.

But technology sometimes comes to the rescue. Online investment platforms such as Fundsindia.com offer the "Flexi SIP" facility to change your monthly SIP investment amounts. All you have to do is set the upper and lower limits and a monthly contribution that you are most likely to make. If you want to reduce your SIP amount, you can do it online. The catch here is that Fundsindia.com does not register your SIP as a SIP in the books of a mutual fund; each monthly investment is recorded as an "additional investment" instead. Hence the flexibility.

If a mutual fund suddenly decides to stop accepting money (as some small and mid-cap funds do in rising markets), Fundsindia.com converts your "Flexi SIP" program into a real SIP and register it as one. Your SIP loses its flexibility.

The best way to overcome the challenge of a job loss is to have a contingency fund. Have about six months of your life, including your loan repayments and SIP commitments, in a chat built through a liquid fund over time. Once this cat is built, even if you decide to quit your job, you can continue your SIP.