SIP Investment Rule: In today’s times, mutual fund SIPs have become the most disciplined and easy option for investors. Just as exercise is essential for physical fitness, a regular investment habit is crucial for financial fitness. SIPs work like a financial workout, where small monthly investments yield substantial funds over time. But investing alone isn’t enough; it’s crucial to follow a smart strategy. To explain this concept in simple terms, the 7-5-3-1 Rule of SIP was created, which provides investors with both direction and discipline.
Significant Benefits of Small Investments in SIPs
SIPs are not magic, but a process that, over time, transforms small amounts into large sums through the power of compounding. Think of it as a long-term marathon where regularity is the most powerful weapon. Markets fluctuate, but the beauty of SIPs is that they provide stability to your investments, keeping you away from emotional decisions.
What is the 7-5-3-1 Rule?
Most people start a SIP, but stop when they encounter downturns or disappointments along the way. The 7-5-3-1 Rule is a method to simplify and understand investing, incorporating both discipline and strategy.
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Returns on investments for up to 7 years
The real impact of SIPs begins to be seen after the seventh year. Returns are low in the initial years, but compounding gradually accelerates. Markets fall, then recover, and in the long run, only those investors who continue investing without interruption win. Those who continued with SIPs after major downturns like COVID-19 saw excellent returns.
Select Your SIP Fund Based on Five Considerations
Choosing a mutual fund without research can be a major mistake. When choosing a fund, it’s important to consider past performance, expense ratio, quality of holdings, the fund manager’s experience, and your risk appetite. These five factors guide SIPs and balance risk.
SIP Goes Through These Stages
Every SIP investor goes through three stages. First, when the portfolio shows signs of red and disappointment sets in. Second, when returns slow and investors become anxious. Third, and most challenging, when a significant decline occurs, many people stop SIPs. In reality, only those investors who survive this difficult phase can build a corpus worth crores.
Learn What a Step-Up SIP is
If you increase your SIP amount by 10 percent every year, it increases your corpus exponentially over the long term. For example, a 12 percent return on an SIP of 15,000 would generate approximately 3 crore rupees in 25 years, but with a Step-Up SIP, the same corpus can reach 8 to 10 crore rupees. The rule is simple: increase a little each year and continue investing for the long term.
Why SIP is Reliable
The biggest advantage of SIP investing is that it provides profits even in falling markets. Rupee cost averaging gives you units at the right price, compounding grows your capital, and discipline keeps you on track. You can start with a small amount and can easily be monitored if needed.
What experts advise
Research is essential before choosing any SIP fund. Direct plans have lower expense ratios, so they offer the potential for higher returns. SIPs are an excellent option for long-term goals like retirement, children’s education, or buying a home, but they are not suitable for short-term goals of 2–3 years.