7-5-3-1 Rule: A Comprehensive Guide to SIP Investment in Mutual Funds:
Introduction
Systematic Investment Plan (SIP) is a popular and effective method of investing in mutual funds. The 7-5-3-1 rule is a simple guideline that should be kept in mind when investing in SIPs in different mutual funds. Let’s take a detailed look:
1. 7 (Large Cap Funds)
Investment Advice: 70% of your mutual fund portfolio should be invested in large cap funds.
Large Cap Funds are a type of mutual fund that invests in large companies based on market capitalization. These types of funds are generally stable and provide good long-term returns.
Example: If you invest ₹10,000 per month as SIP, invest ₹7,000 in large cap funds.
2. 5 (Mid Cap Funds)
Investment Advice: 50% of your portfolio should be invested in mid cap funds.
Mid Cap Funds are a type of mutual fund that invests in mid-sized companies based on market capitalization. These types of funds offer medium risk and medium returns.
Example: Out of a monthly SIP investment of ₹10,000, invest ₹5,000 in mid cap funds.
3. 3 (Small Cap Funds)
Investment Advice: 30% of your portfolio should be invested in small cap funds.
Small Cap Funds are a type of mutual fund that invests in small companies based on market capitalization. These types of funds can offer high risk and high returns.
Example: Out of a monthly SIP investment of ₹10,000, invest ₹3,000 in small cap funds.
4. 1 (Sector/Thematic Funds)
Investment Advice: 10% of your portfolio should be invested in sector or thematic funds.
Sector/Thematic Funds are a type of mutual fund that invests based on a specific sector or theme, such as technology, healthcare, infrastructure, etc. These types of funds can offer high risk and returns based on the specific sector.
Example: Out of a monthly SIP investment of ₹10,000, invest ₹1,000 in sector or thematic funds.
Benefits of this Rule
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Diversification: This rule diversifies your portfolio, which helps reduce risk.
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Balance of Stability and Growth: By investing in large cap, mid cap, and small cap funds, you can balance stability and growth.
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Potential: You can capitalize on the growth potential of specific sectors by investing in sector/thematic funds.
Example of Applying this Rule
Let’s say you want to invest ₹32,000 per month in SIPs. According to the 7-5-3-1 rule, your investment breakdown would be:
- ₹14,000 (70%) in large cap funds
- ₹10,000 (50%) in mid cap funds
- ₹6,000 (30%) in small cap funds
- ₹2,000 (10%) in sector/thematic funds
Conclusion
The 7-5-3-1 rule is a simple and effective approach to SIP investing in mutual funds, helping you balance risk and return. By using it, you can create a well-rounded portfolio suitable for long-term savings.
Additional Tips:
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Start early and invest regularly: The earlier you start, the more time your investments have to grow. And investing regularly helps you average out the cost of units.
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Stay invested for the long term: Mutual funds are meant for long-term investments. Avoid reacting to market fluctuations and stay invested for your financial goals.
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Review your portfolio periodically: As your financial goals and risk tolerance change, review your portfolio and make adjustments as needed.
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Seek professional advice: If you need guidance, consult a financial advisor who can help you create a personalized investment plan. Seek professional advice: If you need guidance, consult a financial advisor who can help you create a personalized investment plan. When considering investment strategies, it’s essential to understand the concept of compounding. The 7-5-3-1 Rule offers a structured approach to managing investments effectively. By adhering to this principle, you can potentially optimize your long-term financial growth.