Understanding the Differences Between Canceling and Stopping a Systematic Investment Plan (SIP)
When it comes to systematic investment plans (SIPs) in the context of mutual funds, there is often a slight difference between canceling a SIP and stopping it. While both options provide mechanisms to modify your investment strategy, they have distinct implications that can significantly affect your financial planning and investment outcomes.
Cancel SIP
Definition: When you cancel a SIP, you are terminating the SIP agreement entirely. This means that you will no longer make any future investments through that SIP.
Implications: Upon cancellation, the SIP will be closed. You may not be able to reactivate it without starting a new SIP from scratch. Existing investments in the mutual fund will remain in your account but no further contributions will be made.
Stop SIP
Definition: To stop a SIP typically means to temporarily halt the investments without necessarily closing the account. This can be useful if you want to take a break from investing but might consider resuming in the future.
Implications: Stopping a SIP could allow you to resume it later without having to go through the entire setup process again. However, the specifics of stopping a SIP can vary by fund house.
Similarities and Differences
While both actions involve pausing SIPs, the primary difference lies in the permanence of the action. Canceling a SIP is a permanent decision, whereas stopping it is temporary. Additionally, the implications and processes for both actions can vary depending on the specific mutual fund house and the plan's terms.
Arguments Against Terminating an SIP Midway
Terming an SIP midway can have serious implications in terms of exit loads and tax implications. For example, if you end a SIP prematurely, you might end up paying short-term capital gains tax instead of long-term capital gains tax, which means a higher tax rate of 15%. This can significantly impact your eventual wealth creation. However, considering the bigger challenge, the impact on wealth creation is often more substantial. Delayed compounding gains and missed opportunities for long-term growth can have a more significant effect on your future wealth.
When to Terminate or Stop an SIP
There are times when terminating your SIP might be logical. One such occasion is when your goal is achieved. For example, if your SIP is mapped to your home equity, and you have already created enough to pay off your home loan, you can terminate that SIP, pay off your home equity, and then take a fresh view on how to invest that money. Another scenario is when your SIP is consistently underperforming the peer group. A couple of quarters of underperformance can be attributed to market volatility. However, if your SIP is consistently underperforming, it is a call to consider shifting your SIP to some other mutual fund. The answer is not to terminate the SIP but to make strategic adjustments to your asset allocation.
Conclusion
Once you commence your SIP, it is crucial to take it to its logical conclusion. Having second thoughts and being impetuous about your SIP decisions can be counterproductive. It's important to carefully evaluate the implications of both canceling and stopping your SIP before making a decision. Always check with your mutual fund provider for specific definitions, procedures, and nuances that may apply to your particular SIP agreement.