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HomeMutual FundsNavigating The 7-5-3-1 Rule of SIP

Navigating The 7-5-3-1 Rule of SIP

Investing is like embarking on a journey. And like any journey, it requires a roadmap. The 7-5-3-1 rule of SIP (Systematic Investment Plan) serves as an essential guide for investors, offering a structured approach to navigating the complex world of investments.  

7 – The Power of Patience

The first element of the 7-5-3-1 rule emphasizes the importance of staying invested for a minimum of 7 years. This may sound daunting, but it’s essential for reaping the full benefits of compounding and minimizing the impact of market volatility. 

Example 

Imagine you started an SIP in a diversified equity mutual fund seven years ago, investing Rs. 5,000 per month. Over time, your investments would have weathered market ups and downs. And the power of compounding would have worked its magic. Your investment value, which might have been around Rs. 4,20,000 (84 months of Rs. 5,000 each), could now be worth Rs. 7,00,000 or more. (Considering an average return of 13.8%) Patience pays off.

Know: Myths and Facts about SIP Mutual funds

5 – The Five-Finger Framework 

  • Embrace Quality: Start by emphasizing quality. Seek investments in companies or assets with a strong track record, solid financials, and a history of reliability. 
  • Pursue Value: Keep an eye out for value. Look for opportunities where assets or stocks are undervalued, potentially offering the chance for future growth and returns. 
  • Opt for GARP (Growth at a Reasonable Price): Consider the GARP approach. Choose investments that balance growth potential with a reasonable valuation, finding the sweet spot where growth is not overpriced.
  • Explore Mid/Small Caps: Diversify your investments by exploring mid and small-cap options. These can often provide exciting growth opportunities that larger, more established companies might miss. 
  • Go Global: Expand your horizons by considering global stocks. Diversify your portfolio across international markets, tapping into global growth prospects and reducing risk through geographic diversity.

Which is better: Mutual Fund SIP vs Stock SIP

3 – The Mental Battle 

Investing isn’t just about numbers; it’s also a mental game. The 7-5-3-1 rule recognizes that investors often face three common mental battles: 

  • Profit Booking: When the market surges, investors may be tempted to cash in and book profits prematurely, fearing a downturn.
  • Discouragement: During market corrections, doubt and discouragement may creep in, causing panic and uncertainty. 
  • Panic Phase: Severe market volatility can trigger panic, leading to hasty decisions like exiting investments. 

Know what to do when – Running out of Funds – Pause or Stop SIP?

1 – Stepping Up the SIP Each Year 

The final component of the 7-5-3-1 rule encourages you to increase your SIP investments each year. This simple yet effective strategy can accelerate wealth creation and help you keep pace with inflation. 

Example: Let’s say you start with a monthly SIP of Rs. 5,000. By increasing it by 10% each year, your SIP contribution grows to Rs. 5,500 in the second year, Rs. 6,050 in the third year, and so on. Over time, this step-up approach can significantly boost your investment corpus. 

Putting It All Together: A Real-Life Scenario 

To make the 7-5-3-1 rule come to life, consider a hypothetical situation. Meet Gayatri, a 28-year-old professional with a long-term financial goal of creating a comfortable retirement fund. She decides to invest in mutual funds, adhering to the rules at every step.

  • 7 – The Power of Patience: Gayatri commits to staying invested for at least seven years, understanding that this time frame will allow her investments to grow through the power of compounding. 
  • 5 – The Five-Finger Framework: She assesses her risk tolerance, which is moderate, given her long investment horizon. Gayatri chooses to diversify her investments across a mix of equity and debt mutual funds. She ensures her portfolio is aligned with her liquidity needs and returns expectations. 
  • 3 – The Mental Battle: Gayatri remains disciplined during market fluctuations. She refrains from the common mental battles, avoiding emotional reactions and adhering to her long-term investment plan. 
  • 1 – Stepping Up the SIP Each Year: Gayatri decides to start her SIP with Rs. 5,000 per month. To combat the eroding effect of inflation and boost her wealth creation, she increases her monthly SIP by 10% each year. 

Through this systematic approach, Gayatri builds a robust investment portfolio that helps her realize her retirement dream. Her adherence to the 7-5-3-1 rule provides a structured path, allowing her to overcome common investment pitfalls and work towards financial security.

Conclusion

It encourages patience, a thoughtful approach to investment selection, a strong mindset, and a step-up in contributions. Remember, investing is not a sprint; it’s a marathon, and with the 7-5-3-1 rule, you’re better prepared for the journey ahead. 

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