7-5-3-1 SIP Rule : In the realm of financial investments, the Systematic Investment Plan (SIP) stands out as a favored strategy, allowing individuals to systematically invest a fixed sum of money at regular intervals.
Table of Contents
While SIP provides a structured approach to wealth creation, optimizing its potential requires a nuanced strategy. The 7-5-3-1 investment approach comprises four key factors designed to enhance success within the SIP investment style.
7-5-3-1 SIP Rule
A Period of More Than 7 Years:
The foundation of the 7-5-3-1 strategy lies in recognizing the importance of time in equity mutual fund investments. While shorter durations might expose investors to increased volatility, a SIP investment period of one year is deemed inadequate. Extending the investment horizon to five years has proven to yield comparatively better returns, yet a lingering 10 percent chance of backlash persists. To overcome this limitation, the strategy advocates for continuing SIP investments for more than seven years. This extended commitment not only increases the likelihood of gains but also reduces the susceptibility to losses, offering a more robust and resilient investment journey.
Five Finger Strategy:
Diversification is a key principle in investment, and the Five Finger Strategy provides a systematic approach to achieve this within the context of equity-based investments. Allocating equal importance to five critical factors – Valuation, Quality, Global Exposure, Small/Mid Cap, and Growth at a Reasonable Price (GARP) – this strategy helps build a well-rounded portfolio.
By considering these diverse elements, investors can create a portfolio that is not only diversified but also resilient to the challenges posed by various market conditions, ultimately aiming for consistent and sustainable performance.
Prepare Your Mind to Face the 3 Phases:
One of the significant hurdles faced by SIP investors lies in navigating the emotional rollercoaster associated with three critical phases: Disappointment, Anger, and Panic. Disappointment sets in when returns from SIPs range between 7-10%, falling short of expectations. The subsequent phase, Anger, emerges when returns dip to 0-7%, leading some to question the efficacy of SIPs in comparison to traditional investments like fixed deposits.
The ultimate test comes during the Panic phase when returns turn negative, triggering the urge to abandon SIPs altogether. Recognizing and preparing for these emotional phases is vital, especially during the initial seven years of investment, ensuring that investors stay committed to their long-term goals and make informed decisions rather than reacting emotionally.
Increase the SIP Amount Every Year:
Acknowledging the power of incremental growth, the 7-5-3-1 strategy recommends increasing the SIP amount for equity-based mutual fund investments annually. Even marginal increments can lead to substantial changes in the final portfolio value over the long term.
This gradual and disciplined approach aligns with the principles of compounding, allowing investors to capitalize on the potential for increased growth in their SIP investments over time.
In conclusion, the 7-5-3-1 SIP strategy offers a comprehensive and structured approach to mutual fund investments. By extending the investment horizon, diversifying through the Five Finger Strategy, preparing for emotional phases, and incrementally increasing SIP amounts annually, investors can position themselves for long-term success. This strategy not only enhances the potential for gains but also equips investors to navigate the complexities of the market with resilience and confidence, ultimately unlocking the full potential of their SIP investments.
Disclaimer: This article is intended for educational purposes only. Prior to making any investment decisions mentioned herein, it is advisable to seek the guidance of a financial expert. Investing in the stock market inherently carries the risk of potential loss. All investment decisions should be undertaken at one’s own risk. The content of this blog and the author do not bear responsibility for any profit or loss that may result from decisions made after reading the article.