What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained (2024)

FAQs

What Is 7-5-3-1 Rule In Mutual Fund SIP Investment? Explained? ›

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.

While a five-year time frame works reasonably well most of the time, there is still a 10% chance of mediocre returns. Choosing a time frame of at least 7 years helps to increase the odds of reasonable returns & reduce the odds of negative returns! Diversify your equity portfolio using a five-finder strategy.

Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up. Eventually, this would be seen within 15 years as its value doubled again after 3 more years.

The rule says to achieve the goal of earning Rs 1 crore, an investor should invest Rs 15,000 monthly through SIP for 15 years, considering a 15% annual return from an equity fund. Consistent adherence to this strategy can lead to significant wealth accumulation.

What is the formula of Triple 5? In Triple 5 formula, the first 5 means retiring five years earlier. Whereas the second 5 means that for this, you will have to increase your SIP by 5 per cent every year. The third 5 means that if you do this continuously, then by the age of 55, you will accumulate more than Rs 5 crore.

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.

The first two SIPs should be in two different large cap funds, the third can be in some good mid cap fund, the fourth SIP of ₹8,000 can be invested in a flexi cap fund and the fifth one can be in any theme of your choice like a small cap fund or special situation fund or an international equity fund or FMCG fund, etc.

How to calculate 15-15-15 rule? To calculate the 15-15-15 rule, multiply 15% of your monthly income by 12 to get the annual investment amount. Invest this amount monthly for 15 years in a mutual fund targeting 15% annual returns. Use an SIP calculator to project potential earnings based on these inputs.

How the Rule of 72 Works. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.

The 4-3-2-1 Approach

One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.

What if I invest $10,000 a month in SIP? ›

At the end of the 20th year of your investment, your corpus will reach around Rs 1 crore. If you continue this investment for another 10 years, or a total of 30 years, your wealth will grow much faster.

Whether a SIP can incur a loss depends on the performance of the mutual fund in which the SIP is invested. If the value of the mutual fund's units decreases due to market conditions the SIP investment will also show a loss.

Increase SIP amount over time

As your income grows, consider increasing your SIP amount. This practice allows you to boost your investments without straining your finances. Gradually increasing your SIP contributions can increase your wealth accumulation.

While choosing the best SIP to invest, it's important to study the historical performance of the returns of those funds. It would be better to look over the trends for past 5 to 10 years and compare within the funds to understand whether they can withstand market volatility or not.

Review the Performance of Funds

A negative performance graph exposes you to more risk and can influence your investment decision. You can withdraw your amount from that fund and invest it in another mutual fund that is performing well. However, look at the returns of at least a few years before making a decision.

1 At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).

Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).