SIP’s 7-5-3-1 Rule: Maximise Power Of SIP Investments With This Rule (2024)

Embarking on the journey of SIP equity investment demands more than financial discipline—it requires strategic acumen. Essentially SIP or Systematic Investment Plan is a regular investment route to mutual funds (MF), where you save frequently in the discipline. But with the 7-5-3-1 rule, a blueprint for maximising SIP returns, you can also reduce the volatility of SIP investments.

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. But generally, there are no negative returns if the investment tenure is three years. But here also the 7-year rule becomes important, because in SIP when an investor invests for 7 years, the average holding period for each SIP is just 3.5 years. This is because, at the end of 7 years, only the first SIP instalment has completed 7 years. In contrast, the last SIP instalment may not have even been completed one month.

Historical data shows once an SIP crosses five years there is a marked reduction in chances of volatility. It is generally hard to find an investment that didn't make money in seven years.

High-Quality Stocks or Large Cap Stocks:High-quality stocks are like the foundation of your portfolio. They are stable, high brand value, well-established companies with solid economic fundamentals and performance, and they can anchor your investments during bear phases. They typically underperform in returns when compared to small caps and mid caps, but can help you reduce the volatility of your portfolio.

Value Stocks: Value stocks are undervalued stocks that offer you good value for your money. Undervalued stocks can be a good investment over a long-term horizon, since they are likely to rise in value in the future, allowing investors to sell for a higher price than what they paid

GARP Stocks:GARP (Growth at Reasonable Price) stocks are the emerging stars, or stocks in sunrise sectors promising future growth. For instance, drones, telecom etc are some sunrise sectors in India.

Midcap or Small Cap:Mid-cap and small-cap companies have room to grow and can offer exponential returns albeit with higher risks than large caps. Some investors say small caps are a more accurate representation of the Indian economy because of its rising nature. Some small-cap mutual funds have given over 60 per cent returns in one year.

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.

Disappointment:Imagine that you were stuck at 7 per cent returns for 6 months, and then equity investors often feel compelled to quickly book profits if the returns reach 9 per cent. Instead, hold on to the stock after acquiring quality stocks at a reasonable valuation and prioritise long-term growth through compounding.

Irritation:There can be blocks of several months when returns can dip below even 5 per cent. Temporary market falls of 10-20 per cent happen almost every year. But the secret lies in trusting stock fundamentals.

Panic:During periods of very low returns or negative, it is essential to remember that market fluctuations are temporary, with rebounds typically occurring after a year or two. For instance, those who held on quality stocks during the 2008 economic depression or the Covid-19 pandemic calmly obviously profited in the next bull run.

An increase in SIP amount every year helps you to reach your financial goals faster and also secure a safe retirement.

Increasing your SIP amount every year by 10 per cent over 20 years results in a portfolio value almost twice the portfolio value you will get with a constant SIP amount every year.