The 7-5-3-1 rule of SIP is fast gaining popularity among investors for the simple yet effective approach to disciplined wealth creation. The investment strategy helps individuals navigate through the emotional highs and lows along with the financial ones of long-term investing while avoiding the inconsistency and diversification traps.
The ‘7’ indicates that, in general, equity mutual funds require an investment horizon of at least seven years to begin with. This helps the investor get the benefit of compounding and also complete cycles of highs and lows in the market. The ‘5’ stands for the required diversification across five types of equity funds-large-cap, mid-cap, small-cap, ELSS, and index funds-to balance risk and return.
The ‘3’ stands for the three emotional stages that are almost a given for investors in their SIP journey: disappointment-between 7-10% returns, and panic-when returns turn negative. When investors know what to expect, it helps them take their emotions in stride and continue with their SIPs rather than making hasty decisions.
The ‘1’ at the end reminds the investor to increase the SIP amount once a year, if possible by a small percentage, so that it keeps pace with rising income and inflation. This ensures that the investment corpus rises steadily over time.
The 7-5-3-1 rule will ensure that the investors retain financial discipline, keep their emotions in control, and amass significant wealth by consistently investing for the long term. It is a simple mantra for those looking to make their SIPs more structured and goal-oriented.
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