Mutual Funds SIPs: Understanding the 7-5-3-1 Rule

At times when markets tend to experience volatility, maintaining a steady course in investment strategies holds relevance. For those aspiring to be successful equity systematic investment plan (SIP) investors, following the 7-5-3-1 rule can be of significance. 

The 7-5-3-1 rule focuses on four factors, which include:

Equity investments tend to perform better in the long run, and a minimum investment horizon of seven years allows for the potential benefits of compounding to materialise.

Short-term fluctuations are quite common in the stock market, and investing for only a year is not likely to provide enough time for the investment to tide over market volatility and yield optimal returns.

The 7-5-3-1 rule stresses short-term thinking when it comes to equity SIPs. The rule emphasises the significance of having realistic expectations related to returns.

Though equity SIPs have the potential for considerable gains, investors need to understand that returns might vary over a period. A seven-year horizon aligns with the long-term nature of equity investments.

Diversification is a risk management strategy, and the five-finger strategy suitably relates to spreading investments across different sectors or asset classes. An investor needs to understand that SIP plans enable them to kickstart their investment journey with a modest amount, gradually compounding into a substantial sum over a period.

This is quite diverse from lump-sum investments, which are vulnerable to market fluctuations. SIPs tend to benefit from market downturns, presenting a unique edge in this regard.

In addition, SIPs automate the saving process and instill a healthy saving habit that might pose a challenge when it comes to maintaining manually.

Generally, SIPs not only generate returns on the invested amount but also on the gains reinvested in the fund. As a result, this compounding effect could turn even modest investments into significant sums, especially when left to compound for a longer period.