I got a mail from a reader. He wanted to know whether it made sense to take the loan moratorium but continue his SIP. Or should he stop the SIP?
No doubt the current situation has reduced many people’s ability to continue investing. Few of my clients in the aviation, hospitality and travel-related sectors are facing issues. Even some businessmen are facing hits due to halt in their revenues due to the lockdown.
There can be different answers based on a person’s unique circumstances.
EMIs and SIP are the two fixed kind of outgoes (other than regular expenses) from a person’s income.
So for those facing cashflow problems, they are sure to be tempted to avail the loan moratorium. But in general, as we have seen in an earlier post I did, its best to avoid moratorium as EMI moratorium increases interest and tenure. Why? It’s because the moratorium doesn’t mean interest waiver or EMI waiver. And the increase in interest can be more for loans like home loans. In fact the impact can be in several lac rupees and several months to years of extended loan tenure. Just as an example: If you take a 6-month moratorium at the start of a Rs 30 lac home loan for 20 years, then it will increase your interest outgo by an additional Rs 9 lac! Here are few more examples here.
So the moratorium should be avoided if possible.
And if it’s about credit card moratorium, then it’s a no brainer. Avoid it at all costs as credit cards have a very high-interest rate (30-40% per annum).
In fact, I will go on to the extent to say that, and I quote myself from an article in Mint (link):
“This is not an EMI waiver. You will still have to service it after a few months (with additional accrued interest). If you think you won’t be able to repay the EMIs even after the moratorium, liquidate some of your investments but stay away from new loans”
RBI had initially announced 3-month moratorium for borrowers. But since the lockdown continued, RBI decided to extend moratorium by 3 months more, thereby taking the total moratorium available for borrowers to 6 months.
But what about SIPs?
SIP is different from EMI.
Loan EMI is a kind of non-negotiable obligation. You have to repay the loan (unless paused by the above-discussed moratorium).
Mutual fund SIP is more voluntary in nature. If you don’t invest in SIP for a few months, it’s not called a default.
I have strongly maintained that all investments should be goal-linked.
So assuming that even SIP is for goal-linked investments, the decision to stop or pause the SIP should be taken accordingly.
So you should reconsider your goals and investments first.
The idea is to assess whether the goals are really important right now or you can push them to a later date.
“If you are unable to invest temporarily due to lack of surplus, it’s completely okay. You could pause your investments for a few months. Right now, liquidity is the king. Investments can be brought back on track once things normalize after a few months. If you manage to have some investible surplus then figure out which of your goals are more critical and try to save for them first. Long-term goals can be reactivated later because a few months of funding gap wouldn’t cause too much harm.” – another of my quote from Livemint article.
And do you know that you can even Pause your SIP? Yes you may opt for SIP pause rather than cancelling / stopping your SIP. Many fund houses offer this facility so if you are facing temporary cash crunch and are unable to invest, then relax. First pause your SIPs for a few months. If it doesn’t work, go on a stop the SIP for time being and try to bring things back on track.
And since we are talking about taking EMI moratorium and stopping/pausing SIP, it means your cashflows are temporarily disrupted or unreliable.
Now one of the many things lockdown has made us realize is that basic living expenses are low. It’s the unnecessary and discretionary expenses that is the reason people find it tough to save. “The lockdown has already cut down discretionary spends to bare minimum for everyone. It’s easy to identify what your core expenses are.” (quote from here). So this is a good time to cut the discretionary spends immediately.
But I must tell you that pausing SIP is fine. But if markets are down and you pause SIP then, it will mean you will miss out on the benefit of rupee cost averaging. Because the moment you stop/pause SIP (due to any reason) when markets fall, it actually beats the purpose of SIP itself. So even the pausing of SIP is to be done only if your cash flows have been badly affected. Don’t pause / stop SIP unnecessarily.
SIP still remains an excellent mode of mutual funds investment. It can help create wealth from equity funds if you invest for reasonably long term. But you need to pick the right mutual funds to invest.
I am soon going to launch a Subscription-only premium product (Stable Model Mutual Funds). It will provide 2-4 Fund recommendation for each suitable MF Categories from both Equity & Debt Funds. If you are interested, do check the Stable Model Funds DETAILS and then pre-register (free) before launch in the coming weeks.