NEW DELHI: Investors are constantly looking out for methods and strategies to increase their return on the investments over the long term while minimizing their risks.
The 7-5-3-1 rule, is one of the most effective strategies experts advise to follow when it comes to invest in Systematic Investment Plan (SIP) to boost your return.
The first fundamental principle of this rule is to have a 7+ year investment period as analysis of historical data reveals that equities generally perform well over a seven-year period, offsetting any losses incurred during market downturns.Investing in equity SIPs for at least seven years allows the power of compounding to reach its full potential. This strategy allows ample time for market fluctuations to stabilize and for the invested capital to grow.
The second principle of this rule is to diversify your portfolio for stability and growth. The 5 Finger Framework recommends spreading investments across five key asset classes to effectively balance risk and reward. These asset classes include high-quality stocks, value stocks, GARP (Growth at Reasonable Price) stocks, midcap or small-cap stocks, and global stocks.
High-quality or large-cap stocks are the foundation of a strong investment portfolio as they have strong economic fundamentals and performance records. They provide stability during market downturns and help reduce portfolio volatility.
Value stocks are currently undervalued in the market and investing in them can be profitable over the long term, as they are likely to appreciate in value.
GARP stocks are promising companies in emerging or rapidly growing sectors. These stocks combine elements of both growth and value investing. Sectors like drones and telecommunications in India are examples of areas where GARP stocks can be found, offering the potential for significant future growth.
Midcap and small-cap stocks represent companies with substantial growth potential. While they carry higher risks than large-cap stocks, they can deliver exponential returns.
Additionally, investing in global stocks adds geographical diversification to a portfolio, protecting it from local economic downturns. It also opens up opportunities in international markets, offering a hedge against domestic risks and enhancing overall portfolio returns.
The third principle of the rule is to be prepared for three challenging phases that SIP investors often encounter. The three phases are disappointment phase, irritation phase and panic phase. Here’s how to mentally prepare for each phase:
Disappointment Phase (7-10% Returns): Investors may anticipate higher returns and feel unsatisfied with moderate gains. Realizing that moderate returns still represent positive progress and are part of the investment process will help prepare for this stage.
Irritation Phase (0-7% Returns): Investors might feel annoyed, thinking fixed deposits could have generated better returns. Investors should accept that market fluctuations are normal and that SIPs are intended for long-term growth beyond short-term performance comparisons.
Panic Phase (Negative Returns): Panic phase begins when the portfolio value fall below the initial investment. However, investors should remain composed and refrain from panic selling. Keep in mind that markets recover over time, and continuing the SIP can result in eventual gains.
The last and fourth principle of this rule is to increase your Systematic Investment Plan (SIP) amount each year to boost your portfolio. Consistently increasing your annual SIP amount, even by a modest amount, can significantly impact the ultimate value of your investment portfolio in the long term.