A SIP is made to get rid of the need for making decisions all the time. The investment happens on a day with a set amount, no matter what the market is doing. That way of doing things is the idea.
The portfolio still needs to be looked at. The question is not if to look. How often. The answer for people is once a year. Checking often usually brings more issues than solutions.
why checking often is not helpful
The desire to look at the portfolio every week or month comes from a good intention. The person wants to be up to date.. The details that come in short periods are mostly unimportant.
A fund that drops 3% in a month might come back the month. A fund that does better than its target for one quarter might do worse for the three. Acting on these short-term changes means buying and selling based on information that does not predict the future.
There is also a price to pay for acting on that information. Funds sold within a year have a tax of 20%. Gains over ₹1.25 lakh are taxed at 12.5%. There are costs if units are sold before a time. Every change made because of a check brings these costs and the new fund has to do better than the old one just to break even.
The studies show this. People who trade often usually get less money back than those who trade less. The difference is partly from the costs and taxes and partly from decisions made at the time that do not work out.
what an annual check should include
The annual review is a check of the structure not of the performance. It looks at whether the portfolio’s still set up right not whether it made money last month.
Asset distribution. Is the split between stocks, bonds and other assets still the same as before? If stocks have gone up and now make up 75% of the portfolio when the target was 60% the portfolio is taking risk than planned. The fix is to rebalance either by selling stocks or by putting SIP money into bonds.
Fund performance compared to the target. Are each of the funds still doing what they were chosen for? A fund that focuses on companies should be compared to the Nifty 50 Total Return Index not to other big company funds or the whole market. One year of not doing is not a problem. Three years of doing the thing with no change in strategy to explain it is something to check.
Fund manager changes. Has the person in charge of the fund changed? A recent change, especially if it is someone from outside is a reason to watch the fund closely. It is not a reason to leave immediately.
SIP increase. Has income gone up in the year? If yes the SIP amount should be higher to match the income. A 10% increase each year is common.
Tax situation. Has the ₹1.25 lakh long-term gain exemption been used for the year? Are there any funds that lost money that could be sold to reduce gains? Are any funds close to having a 12-month period for long-term treatment?
the cases where regular checks are needed
The yearly check is the usual way but there are times when a check in the middle of the year makes sense.
A big change in life. A new job, marriage, having a child buying a house or getting an inheritance changes the situation. The portfolio should show the situation and that might need a check not on the yearly schedule.
A big event in the market. A drop of 20% or more may be a chance to rebalance or to invest more. This is not a reason to sell. It might be a reason to buy more.
Change in goals. If a goal that was five years away is now two years away the way the money is invested for that goal may need to change to include bonds. The check should happen when the time changes, not on the yearly schedule.
A change related to the fund. A change in what the fund does a merge with another fund or a long period of not doing that has not fixed itself may need an earlier look.
what the check should not lead to
The check is a way to look, not a rule to act. If the split is right the funds are doing what they should and the goals have not changed the right answer is to do nothing.
The check should not mean changing funds because they had a quarter. It should not mean stopping the SIP because the market is unstable. It should not mean following a fund that did well year.
The best checks often end up with nothing to change. That is a thing, not a bad one.
how to do the check
The check takes about two hours if done right. Here is a way that works.
Collect the information. Get the statements for all SIPs the current value of the portfolio and the target split. If there are accounts put them all together.
Check the split first. Before looking at each fund check if the total split between stocks and bonds is still as planned. Rebalancing comes after this not from how each fund’s doing.
Look at each fund compared to the target. Use the target for the type. Note any fund that has done worse for three years in a row. Do not change anything after one year.
Check the increase. If income went up raise the SIP amount. If income stayed the same or went down skip the increase that year.
Check the tax situation. See if the ₹1.25 lakh long-term gain limit was used. Look for any funds that lost money that could be sold. Check the time in the market for any fund near the 12-month mark.
Write down any changes needed and make them. If the split has moved a lot, rebalance. If a fund has not done well for a time think about changing it. If nothing needs to change leave it as is.
what individual investors should learn from this
A SIP portfolio should be checked once a year. The check is a way to look at the setup not at the performance.
Checking often brings more noise causes unnecessary trades and adds costs from taxes and fees. Checking often lets things drift without fixing.
The exceptions, like a life change or a big market event need a check in the middle of the year.. Those are not the usual cases.
The best check often says nothing needs to change. That is a sign the portfolio was built right and is working.
FAQs
1. How often should a SIP portfolio be checked?
Once a year is enough for people. The yearly check looks at the split between stocks and bonds the performance of each fund compared to the target if a raise in the SIP is needed based on income and the tax situation including the ₹1.25 lakh long-term gain limit.
Checking often usually leads to unnecessary changes based on market moves that do not matter.
2. Why is checking often a problem?
Short-term changes in the market are mostly not important. Acting on them means buying and selling based on information that does not help. Each change brings a tax of 20% if the fund is held than a year and there may be fees. Trading often usually gets less money back than a steady approach after costs.
3. What should the yearly check include?
The check should look at five things: the split between stocks and bonds compared to the target each funds performance compared to the target any changes in the funds manager if a raise in the SIP is needed based on income and the tax situation including the ₹1.25 lakh long-term gain limit.
4. Are there times when a check in the middle of the year makes sense?
Yes. A big life change like a job, marriage or buying a house; a big drop in the market of 20% or more; a change in how long a goal will take; or a change related to a fund, like a new plan or a merge. These are exceptions, not the case.
5. Does the check mean I should change funds every year?
No. The check is a way to look, not a rule to act. If the split is right the funds are doing what they should and the goals have not changed the right answer is to do nothing. The best check often ends up saying nothing needs to change.
