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How to regularly review your SIP allocation against your goals
28 Jun 2023

The best way to plan for your long term goals is through the Mutual fund SIP route. The systematic investment plan (SIP) offers a methodical way of planning for your financial future with the added benefits of rupee cost averaging and a methodical approach. In fact, the SIP investment performance is all about making the power of compounding work in your favour. The earlier you start your SIP, the longer your SIP will run and more the power of compounding will work in your favour.

However, creating a mutual fund SIP is not a static one-time affair. It has to be monitored regularly, at least once a year or when there are major disruptive events that could impact your financial plan. Here is how to track your SIP investment and also how to check my SIP status.

1.  When inflation calls for a shift in the financial plan

When the financial plan was first created, the inflation was sustaining at around 4.5%. That is the rate of inflation that you had considered as the sustainable inflation for projecting your future costs. However, within 2 years, the sustainable inflation has gone up sharply from 4.5% to 6.5% due to higher food and oil prices. A 2% shift in inflation is a huge shift and can impact in two ways. Firstly, it will mean that your projected costs after 20 years will be much higher and hence you need to increase your investment allocation. Secondly, the present value of your future investments will come down due to inflation. The solution is to quickly work out one of the solutions. You can either look to moderate the size and value of your future goals or you can look to increase your SIP allocation to ensure that you are still comfortable even after considering higher inflation. Alternatively, you can also look to take on higher risk but that is not advisable since your risk should not be too far away from your risk capacity.

2.  When tax changes calls for a review in your SIP allocation

 A classic example will be consider the impact on your future wealth due to the impact of tax on long term capital gains on equity funds. This will reduce your eventual wealth because prior to April 2018, equity funds were fully exempt from LTCG tax. Look at how the LTCG tax will call for a shift in your SIP strategy..

Scenario prior to April 2018Scenario Post April 2018ParticularsAmountParticularsAmountPurpose of SIPForeign EducationPurpose of SIPForeign EducationNeeded after 15 yearsRs.1.70 croreNeeded after 15 yearsRs.1.70 croreMonthly Equity SIPRs.25,000Monthly Equity SIPRs.25,000Tenure15 yearsTenure15 yearsCAGR returns15%CAGR returns15%Invested in 15 yearsRs.45 lakhsInvested in 15 yearsRs.45 lakhsCapital Gains on SIPRs.1.24 croreCapital Gains on SIPRs.1.24 croreTotal Value – 15yearsRs.1.69 croreTotal Value – 15yearsRs.1.69 croreLTCG TaxNilLTCG tax (10% on excess over Rs.1 lakh)Rs.12.30 lakhsNet ValueRs.1.69 croreNet ValueRs.1.57 crore

Solution – Increase the SIP by 10% to àRs.27,500 pm

In the above case, it is clear that the investor falls short of his target when the tax on LTCG is also considered. The solution is to use the thumb rule of increasing the SIP by 10% to Rs.27,500. That will create a corpus of Rs.1.87 crore and after considering the LTCG tax the target will be almost fully covered. That is why regularly review in the light of tax changes becomes essential for your SIP.

3.  Macro changes that impact equity and debt

There are macro changes that could impact the long term value of your equity and debt composition. Macros like interest rates, GDP growth and the exchange rate can have a large impact on the value of your portfolio in the future. For example, if your debt portfolio is largely invested in long-duration bond funds then rising interest rates is not a very conducive scenario. You need to shift your plan to lower duration bond funds. Similarly, if your equity fund exposure is more towards cyclicals then you need to tone that down if GDP growth is slowing. You can consider a temporary shift to more defensive plays that will not be impacted substantially by the economic cycles. That is a good way to hold value.

4.  There could be a shift in the goal posts

Here again, the goal posts could shift for a variety of reasons. For example, you may have created the plan for one child and you may have been blessed with another child. You need to start planning for the second child too. You may have a job loss or you may have entrepreneurial plans and you may be forced to tone down your goal sizes. These are all referred to as shifting of goal posts and call for a review and shift in your SIP strategy too.

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