Doing SIP? You Must Know 7-5-3-1 Rule

You cannot make money from equity investing if you don't follow the rule

Systematic Investment Plan or SIP is easy to start with and everyone should have SIP in stocks (yes, you can have SIP in stocks too) and mutual funds.

In general, you don’t need to do anything out of the box to get good returns when you invest via SIP but you still need to follow the basic rule of 7-5-3-1.

Understanding 7-5-3-1 Rule

The rule is simple and easy to understand. Let us look at what each number means in this rule.

What does 7 mean?

It means you should invest in equity funds for a minimum of 7 years. Why should you do it? Well, I have checked the last 25 years’ data and as per the analysis, if you had invested for at least 7 years at any point, the risk of negative returns is zero. In fact, your chances of earning decent returns are much higher.

Next, 5 stands for diversification.

Your portfolio should have 5 different types of equity funds:

• Large-cap

• Mid cap

• Small-cap

• International funds

• Thematic Fund

If you are new to the market (started investing post 2020-21), you will not understand the importance of diversification as the market has been over-friendly in the last 4 years. But it won’t always stay this way. A well-diversified portfolio helps you navigate all kinds of market cycles.

The 3 in the rule represents the 3 tough phases of SIP.

1. Disappointment phase: When your returns are subpar, around 7-8%. In 2022-23, we were in this sort of phase.

2. Irritation phase: When your returns are even lower than what a Fixed Deposit (FD) would give. My portfolio for the first few years was in this phase.

3. Panic phase: When your returns go negative. Believe me, it is tough to sail through this phase. I went through this phase in 2018 and 2019.

To earn great long-term returns, it is essential to survive these three phases of SIP investing.

Lastly, 1 stands for increasing your investments every year.

You need to consistently increase your SIP amount annually. If you do so, you can build a substantial corpus over time. I aim to increase my investments by 20% annually.

Let me know in the comments, are you following all 4?

This 7-5-3-1 rule can help maximize your SIP returns and make your investment journey smoother!

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