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Tata Capital > Blog > Wealth Services > The Thumb Rule for Investing in SIP the Right Way

Wealth Services

The Thumb Rule for Investing in SIP the Right Way

The Thumb Rule for Investing in SIP the Right Way

Investing in Systematic Investment Plans (SIPs) has long been popular among investors looking to build wealth over the long term. With a disciplined approach to investing, SIP is an automated investment plan that allow individuals to invest small amounts in their chosen mutual funds regularly.

While SIP investment is a simple means to grow your funds over time, market volatilities can affect your investment returns. At such a time, being steady with your investment strategies can help you maximise your SIP returns. One such effective strategy is the 7-5-3-1 rule of SIP.

Read on to know all about the right way of investing in SIP with the 7-5-3-1 rule.

Understanding the 7-5-3-1 rule of SIP

7-5-3-1 is a thumb rule of investing in SIPs that focuses on four critical factors-

1. Have a 7+ year investment horizon

When it comes to equity investing, time holds immense value. Historically, equity investments are known to perform better in the long run, and having a minimum investment period of seven years allows your investment to grow by capitalizing on the power of compounding.

In the short-term, the stock market can be highly volatile, which might not allow your investment to sustain the fluctuations and generate decent returns. So, being patient with your investment with a seven-year horizon gives your funds the time to grow and turn the regular SIP payments into a substantial corpus over time.

2. Diversify your portfolio with the 5-finger framework

A critical aspect of investing in equity funds is diversification, which allows you to build a stable portfolio over time. The 5-finger framework aims to deliver superior returns and minimise risk with a diversified portfolio across various asset classes and investment strategies.

This includes spreading your investment based on 5 areas-

A. Quality: Invest in the stocks of well-established companies that have a history of strong, favourable performance. Such high-quality stocks help stabilise your investment during volatile times.

B. Value: Value stocks are the under-valued stocks in the market with a high potential for great returns. These stocks typically trade at a price lower than the inherent value of their company, but offer good value for money.

C. Growth at reasonable price: These stocks offer high growth potential at low market volatility.

D. Mid/Small cap: Mid and small cap companies hold immense growth potential and can generate substantial returns for the investors. They diversify your portfolio by adding a different market cap segment.

E. Global: Investing in global stocks can offer untapped opportunities for growth and provides a hedge against domestic risks.

3. Prepare for the 3 phases of investment cycle

While SIP investments in equity funds tend to yield decent returns in the long term, you must be prepared to survive the three inevitable phases of failure in the beginning of your investment journey.

A. Disappointment phase: During this phase, you might encounter subpar returns (7-10%).

B. Irritation phase: In the next phase, your investment returns might drop even lower than expected (0-7%)

C. Panic phase: This is the phase where your investment returns become negative

These phases can occur due to volatility in the market. However, they are only temporary and the market tends to recover over the next few years.

4. Increase SIP amount after every 1 year

What makes SIP an attractive investment strategy is the ability to start small. However, gradually increasing your investment amount – specifically after every 1 year can make a big difference to your portfolio value in the long run.

Start your SIP journey

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.

Invest in top-performing SIPs and seek professional advice from the experts at Tata Capital Wealth.

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