With mutual fund SIPs, investing a certain amount on a regular basis helps maintain financial discipline. However, not many investors are aware of the various approaches that can be used while investing in SIPs. In addition to SIP varieties, there are a variety of best practices that can help you optimize your mutual fund SIP investment.
The ‘7-5-3-1’ rule is one such guideline that can make you wealthy using mutual fund systematic withdrawal plans.
What Is The 7-5-3-1 Rule?
A. The Power of Patience (7+ Year Time Horizon)
When it comes to equities investing, time is our most valuable ally. The first tenet of the 7-5-3-1 rule is to have an investment time horizon of seven years or more. It’s about the amazing power of compounding, not just the profits. Investing over a period of seven years allows our money to develop and gradually transform tiny, regular investments into a sizable corpus.
Therefore, it is evident what the most important lesson is: value patience. Consider your stock investments as a long-term investment, and benefit from the compounding effect.
B. The Art of Diversification (The 5-Finger Framework)
The key to providing an otherwise volatile equities portfolio with the much-needed steadiness is diversification. The benefit of variety is provided by the 5 Finger Framework.
The 5 Finger Framework may be compared to putting together a team of subject matter experts. Our assets shouldn’t be overly concentrated on one asset class or investing approach, just as we wouldn’t rely on a single skill set to handle all of our problems.
The five sectors that we need to distribute our assets in order to diversify our stock portfolio are as follows:
First and foremost, pay attention to quality: A portfolio’s basis is made up of high-quality equities. These are dependable, well-established businesses that have a track record of reliable performance; they may serve as an anchor for your assets in difficult times. Learn about reputable businesses.
Second, Look for Value: Undervalued diamonds are sometimes found in value stocks. When markets are erratic, they might act as a safety net by giving you good value for your money.
Third, choose GARP (growth at a reasonable price) stocks: These are the up-and-coming companies with the potential for future growth. They increase the possibility of greater profits without taking on undue risk.
Fourth, Look for Mid/Small Cap Companies: These businesses may yield exponential profits and have the opportunity to develop. They represent a distinct market cap category, which adds diversification to your portfolio. Go over small-cap stocks in greater detail.
Fifth, Search for International Stocks: By diversifying your investments geographically, you may shield them from regional economic downturns. Investing internationally may provide protection against domestic hazards as well as lead to interesting possibilities. Learn more about purchasing foreign company stocks.
C. The Three Mental Fights (3)
You must be ready for the unavoidable periods of failure as you start your stock investment adventure in India. There are phases to the sense of failure. There will be moments of feeling like you’ve failed and moments of pure joy. These might be referred to as the panic phase, discouragement, and the race to book profits in the mind.
D. Stepping up the SIP Each Year(1)
The key to increasing wealth creation is to increase SIPs. You may increase your wealth simply by increasing your SIP amount by a little bit each year.