What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained (image source: iStock)
Investing in Mutual Funds through a Systematic Investment Plan (SIP) can be a great way to grow wealth systematically over time. The
7-5-3-1 rule is a simple guideline that investors can follow to structure their SIP investments strategically.
What Is 7-5-3-1 Rule?
The 7-5-3-1 rule in SIP (Systematic Investment Plan) mutual fund investment is a simple guideline to help investors structure their investments strategically. It provides a framework for allocating funds across different components, aiming to enhance diversification, manage risk, and seize opportunities. The 7-5-3-1 rule is explained here below.
(7)Seven Times Annual Income: Setting the Foundation
The first step in the 7-5-3-1 rule is to determine your annual income. Financial experts often suggest initiating your SIP investments with a total amount equivalent to seven times your annual income. This forms the foundation of your investment strategy and helps kickstart your wealth-building journey.
(5)Five SIPs for Diversification: Spreading the Risk
Once you've determined the initial investment amount, the next step is to divide it into five separate Systematic Investment Plans. Each SIP represents a different Mutual Fund scheme or category. Diversifying your investments across various funds helps spread the risk and enhances the potential for returns. Consider allocating funds to equity, debt, and hybrid funds based on your risk tolerance and financial goals.
(3)Three Asset Classes: Balancing Risk and Reward
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. Hybrid funds combine both equity and debt components, offering a balanced approach. Allocating your investments across these asset classes helps strike a balance between risk and reward based on your financial objectives.
(1) One-Time Investment: Seizing Opportunities
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. It could be used to rebalance your portfolio, take advantage of market downturns, or invest in a fund that aligns with emerging trends. This one-time investment adds a tactical element to your overall investment strategy.
7-5-3-1 Rule A Simple Gude For SIP Success
The 7-5-3-1 rule offers a straightforward blueprint for structuring your SIP Mutual Fund investments. It starts with a solid foundation, encourages diversification across multiple SIPs and asset classes, and incorporates a strategic one-time investment component.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. Times Now Digital suggests its readers/audience to consult their financial advisors before making any money related decisions.)
FAQs
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.
What is the rule for SIP investment? ›
The 7-5-3-1 is a powerful and effective thumb rule to start your SIP journey toward wealth creation. With this strategic approach, you can strike a good balance of risk and reward, diversify your investments, and ensure great returns.
What is the 5 finger strategy for SIP? ›
Diversify your equity portfolio using a five-finder strategy. This distinct portfolio construction strategy places equal emphasis on five key schemes: value, quality, global exposure, mid/small cap, and growth at a reasonable price (GARP).
What is the formula for SIP investment? ›
How do SIP calculators work? M = P × ({[1 + i]^n – 1} / i) × (1 + i). M is the amount you receive upon maturity. P is the amount you invest at regular intervals.
What is the 8 4 3 rule for SIP investment? ›
The rule of 8-4-3 for mutual funds states that if you invest Rs 30,000 monthly into an SIP with a return of 12% per annum, then your portfolio will add Rs 50 lacs in the first 8 years, Rs 50 lacs in the next 4 years to become Rs 1 cr in total value and adds further Rs 50 lacs in the next 3 yrs to reach Rs 1.5 cr.
What is the 7 5 3 1 rule in SIP? ›
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.
What is the 15-15-15 rule in SIP? ›
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.
What is the best time to do SIP? ›
The right time to invest in SIP is typically as early as possible, regardless of short-term market fluctuations. Since SIPs leverage rupee cost averaging, investing regularly over time helps mitigate the impact of market volatility. This approach suits those who prefer a disciplined, long-term investment strategy.
What is the 15 rule in SIP? ›
Start small and grow big
500 per month through a systematic investment plan (SIP). For example, if you invest Rs. 500 per month for 15 years in a mutual fund that gives 15% annual returns, you will have Rs. 3.85 lakh at the end of the period.
How to do SIP for beginners? ›
How to Invest in Systematic Investment Plan (SIP)
- Set investment goals – The most important step is to know your risk tolerance. ...
- Choose a Mutual Fund scheme – There are various schemes available in the market. ...
- Apply – Once you have chosen your preferred scheme, you can now apply for the SIP of your choice.
The SIP calculator shows that a monthly investment of Rs 5000 in the direct plan of this scheme would have grown to approx. Rs 30.5 lakh in 10 years. Monthly SIP of Rs 5000 in the regular plan would have grown to approx. Rs 28.6 lakh in 10 years.
What if I invest $5,000 in SIP for 20 years? ›
If someone begins a SIP of 5000 per month for a span of 20 years, at 12% assumed annualized rate of return per annum, your total investment in 20 years is Rs. 12 lakh and the accumulated corpus at the end of tenure is close to Rs. 50 lakhs.
What if I invest $5,000 in SIP for 5 years? ›
How much is Rs. 5,000 for 5 years in SIP? If you invest Rs. 5,000 per month through SIP for 5 years, assuming 12% return. The estimate total returns will be Rs. 1,12,432 and the estimate future value of your investment will be Rs. 4,12,431.
What if I invest $1,000 a month in SIP for 30 years? ›
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.
What is Rule 72 method? ›
For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.
What is Rule of 72 for SIP? ›
The rule of 72 operates on the principle that you can roughly determine the number of years it takes for an investment to double by dividing 72 with the expected annual rate of return.
What happens if I invest $1,000 in SIP for 30 years? ›
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.
What happens if I invest $1,000 in SIP for 10 years? ›
(You must convert the rate of return to the monthly figure through dividing by 12). You also have n = 10 years or 120 months. FV = Rs 1,84,170. So, the future value of a SIP investment of Rs 1,000 per month for 10 years at an estimated rate of return of 8% is Rs 1,84,170.
