Systematic Investment Plan has captured the imagination of Indian investors. Built on the foundation of convenience, rupee cost averaging and the power of compounding, SIPs are garnering increasing investment every month.
The 7-5-3-1 rule sets out the basics of investing in mutual fund SIPs. (Picture Credit: depositphotos)
Systematic Investment Plan or the SIP is the new idol of the Indian investors. The inflow through SIP went up to Rs 21,262.22 crore in June 2024 compared to Rs 20,904.37 crore in the preceding month. The number of SIP accounts stood at 8.98 crore in June against 8.75 crore in May.
SIP rule for investment
But then one cannot just invest according to one’s whims. For optimum results one needs to follow some time-tested rules, say experts. The 7-5-3-1 rule is recognised by many investment strategists for its efficacy.
The 7-year rule
The first key to the 7-5-3-1 rule is to follow an investment duration of at least 7 years. Equities tend to perform very well over a period of 6 years. Investing in equity SIPs with a minimum time span of seven years unleashes the power of compounding well. Compounding is a universal principle of mathematics that says the more time period you allow, compounding (as in say interest) builds disproportionately more wealth for you.
What is meant by 5
The next number 3 refers to a diversification strategy. Diversification strategy forbids an investor to put all the eggs in one basket. The 5 asset classes indicated here are high-quality stocks, value stocks, Growth at Reasonable Price (or GARP) stocks, midcap or small cap stocks and global stocks. Each of these asset classes has a specific role in making your portfolio robust, ironing out too much volatility and achieve steady returns.
The next number 3 underlines (and prepares) any investor mentally for tough times. These three phases in an investment journey are Disappointment, Irritation and Panic. The disappointment phase is typically characterised by returns ranging from 7-10%.
The 3 phases
The irritation phase refers to your schemes fetching you returns between 0-7%. The typical thought to grip one is that the good old bank fixed deposits (FD) would have fetched higher returns. The panic phase takes place if the portfolio shows negative returns, which means the value of the investment is lower than the nominal value of the money the investor has put in.
Try to do this every year
The last number 1 indicates that every year one should increase the amount of SIP. It is not a matter of opinion but of pure arithmetic that increasing SIP – called step-up SIP – can raise the value of your portfolio hugely over a period of time.
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