What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained (image source: iStock)
Investing in Mutual Funds through a Systematic Investment Plan (SIP) can be a great way to grow wealth systematically over time. The
is a simple guideline that investors can follow to structure their SIP investments strategically.
What Is 7-5-3-1 Rule ?
The 7-5-3-1 rule in SIP (Systematic Investment Plan) mutual fund investment is a simple guideline to help investors structure their investments strategically. It provides a framework for allocating funds across different components, aiming to enhance diversification, manage risk, and seize opportunities. The 7-5-3-1 rule is explained here below.
(7)Seven Times Annual Income: Setting the Foundation
The first step in the 7-5-3-1 rule is to determine your annual income. Financial experts often suggest initiating your SIP investments with a total amount equivalent to seven times your annual income. This forms the foundation of your investment strategy and helps kickstart your wealth-building journey.
(5)Five SIPs for Diversification: Spreading the Risk
Once you've determined the initial investment amount, the next step is to divide it into five separate Systematic Investment Plans. Each SIP represents a different Mutual Fund scheme or category. Diversifying your investments across various funds helps spread the risk and enhances the potential for returns. Consider allocating funds to equity, debt, and hybrid funds based on your risk tolerance and financial goals.
(3)Three Asset Classes: Balancing Risk and Reward
The 7-5-3-1 rule emphasizes diversification not only across different Mutual Fund schemes but also across three primary asset classes: Equity, Debt, and Hybrid. Equity funds carry higher risk but also offer the potential for higher returns. Debt funds are generally lower risk but provide more stable returns. Hybrid funds combine both equity and debt components, offering a balanced approach. Allocating your investments across these asset classes helps strike a balance between risk and reward based on your financial objectives.
(1) One-Time Investment: Seizing Opportunities
While the majority of your SIP investments are spread across multiple funds, the 7-5-3-1 rule suggests setting aside a portion for a one-time lump sum investment. This allows you to capitalize on specific opportunities or market conditions. It could be used to rebalance your portfolio, take advantage of market downturns, or invest in a fund that aligns with emerging trends. This one-time investment adds a tactical element to your overall investment strategy.
7-5-3-1 Rule A Simple Gude For SIP Success
The 7-5-3-1 rule offers a straightforward blueprint for structuring your SIP Mutual Fund investments. It starts with a solid foundation, encourages diversification across multiple SIPs and asset classes, and incorporates a strategic one-time investment component.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. Times Now Digital suggests its readers/audience to consult their financial advisors before making any money related decisions.)
