Equity investments are one of the most profitable forms of investing, especially if done right. But at the same time, it can be a bit nuanced as well. This is because stocks often come with an increased level of risk, and you must understand them thoroughly to be able to make the most of them.
Mutual funds simplify equity investments by providing you with a handpicked basket of stocks and professional management. SIPs in mutual funds let you create a corpus through smaller instalments. But even then, equity SIP investments can get tough. The 7-5-3-1 is something that can help you here. : Let us learn more about the 7-5-3-1 rule for equity SIP investments and how it helps your investment.
What is the 7-5-3-1 rule for equity SIP investments?
The 7-5-3-1 rule is an easy-to-follow guide that will help you become a successful equity SIP investor so that you can enjoy superior returns over the course of a longer period. It helps you with how you choose your investment options and how you should manage them. Each number denotes a particular factor of your investment that you should pay attention to.
Have a 7+ year investment horizon
Long-term investments almost always outperform the market, particularly when investors try to time the market to maximize their returns on their holdings. When investors trade based on their emotions, their returns often suffer as a result. The stock market indexes have generated positive returns for investors over the majority of periods spanning seven years or more. It is considered a sign of a good investor to be able to ride out temporary downswings in the market. The numbers don’t lie; research shows that investing for the long term offers several advantages. Even the smallest amount of savings has the potential to grow into a respectable sum of money if you take a level-headed approach and employ an investment strategy that is focused on the long term.
Diversify using the five-finger rule
The act of spreading your wealth across several distinct investment vehicles is an example of diversification as a financial strategy. Because investments don’t usually move as a group, diversification ensures the safety of your investment portfolio. You may use the five-finger rule to ensure diversification.
The portfolio should have an equal amount of diversification across a variety of tried and true investment strategies, including quality, value, growth at a reasonable price, mid/small cap, and global investments, SIP investments
Prepare for three phases of failure.
You should be prepared to tackle three phases of failure.
- The Disappointment Phase: This is the phase in which the returns are below average (between 7 and 10 per cent).
- The Irritation Phase – This is the phase in which the returns are significantly lower than what we had anticipated (between 0% and 7%).
- The Panic Phase — This is the phase in which the returns are negative (below 0%).
Increase your SIP amount after every year
Compounding interest or growth is the foundation of how SIP mutual funds function as an investment vehicle. It suggests that the return is determined based on the prior principal amount in addition to the prior interest that has accrued.
Therefore, a rise in the principal amount contributes to an increase in both the interest income and the new principal amount. As a consequence, there is a considerable increase in returns when you increase your SIP amount every year.
Equity investing can get quite confusing, but the above rule is helpful in understanding and strategizing equity SIP investment much better.