SIP- Investing in stocks through a Systematic Investment Plan (SIP) is the easiest way, but many of us unknowingly complicate it. To make it easier for you, we offer Funds India’s 7-5-3-1 rule – which is a very simple and effective rule. These rules will give you the edge to become a good SIP investor in stocks and get better long-term returns.
What is the 7-5-3-1 rule?
- Have an investment time frame of 7+ years
stock market generally performs well over a period of more than 7 years. Over the past 22+ years, when invested over a one-year period, 58% of that period is such that Nifty 50 TRI has yielded an annual return of more than 10%.
However, if the investment is made over a period of 7 years, then in 22 years, 80% of the period is such that more than 10% returns have been received from the equity market. (i.e. 8 times out of 10, more than 10% return).
Other than that, investors did not get any negative returns despite the poor state of the market over a 7-year period. Investors must have earned at least 5% annual return even in the worst case scenario. Therefore, stay invested for up to 7 years to get the most out of your SIP equity investment.
- Diversify your stock portfolio with the 5-finger framework
When we invest solely on the basis of past returns, we make the portfolio dependent on certain styles and themes. And when the era of these themes is over, your entire portfolio tends to underperform for a long time.
Therefore, diversify your portfolio across different investment avenues, sectors, and market capitalizations to build a good long-term portfolio that gives you better returns with less volatility across all market cycles. Our unique 5 Finger Framework stock portfolio construction strategy is designed with this in mind.
The “5 Finger Framework” aims to provide consistently superior performance over the long term with fewer downsides. The portfolio is evenly diversified across equity funds that make investment decisions at different times based on quality, value, fair value growth, mid and small cap and global considerations.
- Prepare mentally for 3 common failure points
Stock markets have historically provided better returns over longer periods of time, the real challenge is to avoid the three temporary but inevitable phases of failure that occur in the first few years (most often in the first 5 years).
- The desperation phase – where the returns are up (7-10%).
- Irritation phase – where returns are well below our expectations (0-7%).
- Panic phase – where returns are negative (below 0%).
This phase occurs due to volatility in the stock market. Indian stock market history of over 42 years shows that – almost every year there is a temporary drop of 10-20% in the market and once every 7-10 years there is a drop of 30 60% on the market.
The first year of your SIP investment journey can be very difficult as there can be a sharp drop in stock returns if the market falls intermittently, leading to frustration, irritation and panic. Such steps cannot be avoided.
However, these declines are very temporary. Historically, the stock market gets back on track in 1-3 years and also gives better returns.
- Increase your SIP amount every 1 year!
Even a small increase in the amount of your SIP equity investment each year can make a huge difference in the value of your long-term portfolio.
By increasing the amount of SIP every year, it helps you-
To reach your financial goals faster.
Expand financial goals (for example, you can buy a 3BHK house instead of 2BHK.)
A 20-year SIP gives twice the return of the amount invested through a normal SIP, with an annual increase of 10% each year in the value of the portfolio.
For example, the portfolio value of a SIP of Rs 5,000 increases to Rs 49 lakh after 20 years with an annualized return of 12%. However, when the amount of the SIP is increased by 10% every year, the value of the portfolio increases to Rs 98 lakh after 20 years, i.e. double the returns of a normal SIP.
By following the 7-5-3-1 rule, you are set for your wealth creation journey 🙂
