What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained (2024)

FAQs

What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained? ›

The 7-5-3-1 rule emphasizes diversification not only across different Mutual Fund schemes but also across three primary asset classes: Equity, Debt, and Hybrid. Equity funds carry higher risk but also offer the potential for higher returns. Debt funds are generally lower risk but provide more stable returns.

At the core of the SIP strategy lies the 7-5-3-1 rule, which stresses a seven-year investment tenure. Proponents of this rule say seven years is the minimum holding period, which has not seen negative returns in the market as the market goes through a complete cycle in around seven years.

Follow this 7-5-3-1 rule. 1 year is too short a time frame and not suitable for equity SIP investing. While a five-year time frame works reasonably well most of the time, there is still a 10% chance of mediocre returns.

The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up.

What is 15-15-15 Rule? The rule says to achieve the goal of earning Rs 1 crore, an investor should invest Rs 15,000 monthly through SIP for 15 years, considering a 15% annual return from an equity fund. Consistent adherence to this strategy can lead to significant wealth accumulation.

Determine the objective of your investment and get an ideal portfolio. Choose a Mutual Fund scheme – There are various schemes available in the market. The funds you select should consider your goals and risk tolerance. Evaluate the recent performance of the Mutual Fund you prefer.

The first two SIPs should be in two different large cap funds, the third can be in some good mid cap fund, the fourth SIP of ₹8,000 can be invested in a flexi cap fund and the fifth one can be in any theme of your choice like a small cap fund or special situation fund or an international equity fund or FMCG fund, etc.

In conclusion, the 4 golden rules of investment - start early, watch out for costs, stick to your goals, and diversify - collectively play a crucial role in building a resilient and rewarding investment portfolio. By starting early, investors can benefit from compounding returns over time.

If you were to invest Rs 1,000 per month into an equity SIP over a span of 30 years at 12 per cent per annum, you would have invested only Rs 3.6 lakhs. However, your portfolio's value would have grown to an impressive Rs 34.9 lakhs.

Calculation of SIP returns

To understand this, let us take an example. A monthly investment of Rs 5,000 for 10 years at an expected rate of return of 12 per cent will earn you Rs 11.61 lakh.

What is the ideal period for SIP? ›

Generally, an SIP carries an end date after 1 Year, 3 Years or 5 years of investment. The investor can hence withdraw the amount invested whenever he wishes or as per his financial goals.

While the majority of your SIP investments are spread across multiple funds, the 7-5-3-1 rule suggests setting aside a portion for a one-time lump sum investment. This allows you to capitalize on specific opportunities or market conditions.

While choosing the best SIP to invest, it's important to study the historical performance of the returns of those funds. It would be better to look over the trends for past 5 to 10 years and compare within the funds to understand whether they can withstand market volatility or not.

The performance might turn the investor against the fund and make them want to withdraw their money from the investment. An investor would want to cancel the SIP if the overall objective of the fund changes when there is a change in the fund's objective, even if the asset allocation of the fund changes.

What is the formula of Triple 5? In Triple 5 formula, the first 5 means retiring five years earlier. Whereas the second 5 means that for this, you will have to increase your SIP by 5 per cent every year. The third 5 means that if you do this continuously, then by the age of 55, you will accumulate more than Rs 5 crore.

While SIP investment is a simple means to grow your funds over time, market volatilities can affect your investment returns. At such a time, being steady with your investment strategies can help you maximise your SIP returns. One such effective strategy is the 7-5-3-1 rule of SIP.

The SIP calculator will generate a result using the above information and the following formula: Amount invested × ({[1 + Periodic rate of interest] Total number payments – 1} / Periodic rate of interest) × (1 + Periodic rate of interest).