Mutual fund SIPs have proven to be a great way to remain financially disciplined by investing a particular amount regularly. But not many investors are aware of the different ways in which one can approach investment in SIPs. Besides the various types of SIPs, there are also different thumb rules that can help you maximise the investment in mutual fund SIPs.
One such rule is the ‘7-5-3-1’ rule that can help you become rich through mutual fund SIPs:
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What Is The 7-5-3-1 Rule?
The Power of Patience (7+ Year Time Horizon)
In the world of equity investing, time is our closest ally. The 7-5-3-1 rule’s first fundamental principle is having a 7+ year investment time horizon. It’s not only about the returns; it’s about the magical power of compounding. When we invest with a 7+ year horizon, our money gets the time to grow and turn small, consistent investments into a substantial corpus over time.
So, the key takeaway is clear: embrace the power of patience. View your equity investments as a long-term commitment, and let the magic of compounding work in your favor. Click here to understand the power of compounding in detail.
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The Art of Diversification (5 Finger Framework)
Diversification is the secret sauce that can give the much needed stability to your otherwise risky equity portfolio. The 5 Finger Framework is what deals give the benefit of diversification. It is one of the second most vital concepts in the 7-5-3-1 rule of SIP, as per Getmoneyrich.
The 5 Finger Framework is like assembling a team of experts in different fields. Just as we wouldn’t rely on a single skill set to solve all our problems, our investments should not be too focused on one asset class or an investment strategy.
When it comes to diversification of our equity portfolio, the following are the five areas where must spread our investments:
First, Focus on Quality: High-quality stocks are like the foundation of your portfolio. They are stable, well-established companies with a history of solid performance, and they can anchor your investments during rough times. Read about blue-chip companies.
Second, Look For Value: Value stocks are often underrated gems. They can provide a safety net by offering good value for your money, especially when markets are turbulent.
Third, The go for GARP (growth at reasonable price): These stocks are the rising stars, promising future growth. They add the potential for higher returns without excessive risk.
Fourth, Look for Mid/Small Cap: These companies have room to grow and can offer exponential returns. They introduce diversity into your portfolio by representing a different market cap segment. Read more on small-cap stocks.
Fifth, Look for Global Stocks: Diversifying geographically protects your investments from local economic downturns. Investing globally can also open doors to exciting opportunities and a hedge against domestic risks. Read more on how to buy stocks of overseas companies.
By diversifying across these five areas, investors can consistently outperform the broader market. It’s like having multiple arrows in your quiver. Each serves a unique purpose thereby increasing our chances of hitting the target. You can think of diversification as an insurance policy for your investments. It’s an approach that’s stood the test of time and has been a crucial part of my own equity investing journey.
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The Three (3) Mental Fights
As you embark on your equity investment journey in India, it’s essential to be prepared for the inevitable phases of failure. It is a reality that I’ve personally encountered and conquered several times. The feelings of failure come in phases. At times, there will be euphoria, and at other times there will be a sense of failure. They can be called the mental fights-hurry to book profits, feeling discouraged and the panic phase.
Stepping up the SIP Each Year(1)
The main idea behind SIPs is to help you invest a small amount on a consistent basis for wealth creation, right? But in this process, the secret to further creating wealth is to step up SIPs. Just by stepping up your SIP amount by a small percentage or amount every year, you can further push up your corpus.
