7-5-3-1 Mutual Fund Rule: Simple SIP Formula for Big Returns

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Did you know choosing the right strategy is equally important as choosing the right fund? But is there any rule that you heard of? Yes, there is.

Have you heard about the 7-5-3-1 SIP rule? If not, your portfolio needs this strategy to boost its overall returns.

It is a powerful investment approach that will help you create a strong wealth over time.

Well, let's see step-wise what these numbers actually mean and how they can help you achieve stable returns.

What is the 7-5-3-1 Rule?

In simple words, you can break down the 7-5-3-1 SIP rule into four parts, staying disciplined, diversified, precautionary and step-up portfolio.

Are you someone looking to build wealth in the equity market via SIP? If yes, then follow these steps carefully:

Step 1: The power of compounding: 7+-year investment period

• Research has shown that equity markets perform well in a minimum 7-year time frame.
• Looking at the past 22 years' track record, Nifty 50 TRI has given over 10% annualized returns only 58% of the time when people invested for just 1 year.
• However, this percentage has improved by 80% with a 7-year investment period.

This means the longer you stay invested, the better your chances of getting good returns on your Mutual Funds.

Step 2: Benefits of Diversification: 5-Finger Strategy

As you know diversification means dividing assets is the only key to achieving success. You just need to focus on these 5 parameters:

• Quality Stocks
• Value Stocks
• High Growth Margin Stocks
• Stocks at Reasonable Price
• Large, mid and small cap funds

This strategy has given the following results:

1. Consistent Performance: In 10 years, it has outperformed the Nifty 50 TRI by 4% on an annualised basis.
2. Lower Downside Ratio: During the COVID crash it managed to keep a -28% ratio whereas Nifty 50 TRI went up to 38%.  
   
   

Step 3: Three Common Mistakes to Consider

• The Disappointment Phase: The phase where returns are below 7-10%.
• The Irritation Phase: Here returns are much lower at 0-7%.
• The Panic Phase: It is a phase of red alert, where investments turn negative or below 0%.

Although it is natural to experience these phases as a result of volatility in the equity market. In the last 42 years of Indian market history, temporary falls of 10-20% happened every year. However, equity investments have a record of timely recovery with improved returns in the next 1-3 years.

Step 4: Step up SIP after every 1 year

• It is a powerful tool to Step Up SIP much like a systematic investment plan; you slowly increase your SIP amount at various intervals like, 3 months, quarterly or yearly.
• Through this technique, you can increase your SIP values to 10% every year doubling the profits each year.

Conclusion

In short, the 7-5-3-1 rule gives a clear and systematic investment approach to boost the overall SIP (systematic investment plan) returns in your portfolio. If you are someone who does not shy away from trying new methods, this is the best strategy for you.

Also Read : How Energy Sector Mutual Funds Are Transforming Ordinary Portfolios in 2024