The Security and Exchange Board of India (Sebi) has said that three consecutive payment failures towards a mutual fund systematic investment plan (SIP) through the electronic clearing service (ECS) will result in the cancellation of the SIP, effective from April 1, 2024.

In India, SIP investors increased from around 64 million in April 2023 to 82 million in February 2024, data from the Association of Mutual Funds in India (AMFI) shows.

Sebi announced the changes in a circular on January 3, 2024, although the rules took effect only from April 1. These changes are important for SIP investors as the new financial year has just begun.

Investors can invest in an MF scheme daily, monthly, semi-annually, and annually with a SIP plan. However, after selecting the plan, they must ensure adequate balance in their bank accounts to smoothly transfer the funds to the fund manager or the asset management company (AMC).

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Here are some payment-related scenarios when the SIP could be cancelled:

Failed Payment For Three Times In A Row: As per the Sebi circular, an SIP with a daily, weekly, fortnightly, and monthly frequency will be cancelled if the ECS payments fail three consecutive times.

Failed Payment For Two Consecutive Times: SIPs with a quarterly, half-yearly, and yearly payment cycle will be cancelled if ECS payments fail twice.

According to the circular, the AMC or the Registrar and Transfer agents (RTA) must inform the investor about the payment failure and its consequences if it happens for the first time. For instance, it said they should inform them that “the SIP will cease in case of three consecutive rejections and another communication will be sent to them after the cancellation.

Who Does This Rule Apply To?

The rule applies to new and existing SIP investors, including debit attempts that failed before April 1, 2024. If a payment fails before this date, investors should ensure it does not happen again. A maximum of two failures are allowed in a debt transaction. However, investors can request the AMC for cancellation, and it will comply with the request within 10 days.

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Points To Note:

One primary reason for SIP payment failure is insufficient balance. Banks charge a penalty for failed ECS payments. So, ensure adequate balance in the bank account before the due date.

For people with irregular income, pausing the SIP and restarting it when there is sufficient balance may make sense.

The changes in the ECS rules are effective April 1, 2024; seven AMCs have confirmed implementing this rule so far.