Best Investment Tips That Can Help Investors Benefit From Mutual Fund SIPs

Mutual fund SIPs are the most talked about topic when it comes to achieving financial independence where you make a regular investment of a small amount in a disciplined manner. In a Systematic Investment Plan (SIP) an investor picks a mutual fund scheme and invests the fixed amount of his/her choice at fixed intervals. SIP investment plan is about investing a small amount over time rather than investing a one-time huge amount resulting in a higher return.

Though SIPs have become very popular these days, still many investors are not aware of the different ways they can approach investment in SIPs. Besides the various types of SIPs, there are also various thumb rules which if followed can help you maximize the investment in mutual fund SIPs. In this article, we will talk about five rules that you should follow to turn your mutual fund SIPs into a profitable investment.

1. Start early

One golden rule is to start your MF SIPs as early as you can. The earlier you start, the better your principal earns returns and thus the more your returns earn returns popularly called the power of compounding. In fact, the amount of the SIP and the rate of return, it is the time period that makes the biggest difference.

2. Stay genuine to your SIP and stay disciplined

Another important rule of SIP is to stay genuine to your SIP. Also, make it a rule to stay disciplined in your SIP investment. Once you begin a SIP, make sure that you do not discontinue the SIP or that you do not miss on SIP contributions. Remember that your SIP is all about reinvestment of principal and returns. Hence, always prefer a growth plan over a dividend plan as the growth plan ensures automatic reinvestment in the fund.

3. Prefer diversified equity funds

Instead of opting for a single equity fund, make your long-term SIPs in diversified funds. Most sector funds and thematic funds experience cycles and involve concentration risk. You invest in mutual funds to diversify your risk and if you opt for a sector fund or a thematic fund you are going against the basic rule of diversification. When you are trying to create wealth in the long run, it is always recommended to spread your risk and the best way to achieve this is through diversified equity funds.

4. Follow the 7-5-3-1 rule

The 7-5-3-1 rule's first fundamental principle is having a 7+ year investment time horizon. The 7-5-3-1 rule's first fundamental principle is having a 7+ year investment time horizon. It's not only about the returns; it's about the magical power of compounding. When we invest with a 7+ year horizon, our money gets the time to grow and turn small, consistent investments into a substantial corpus over time.

What does 5 stand for in the 7-5-3-1 rule?

Diversification. The number 5 in the 7-5-3-1 rule of SIP stands for diversification. According to experts, you should at least have asset classes based on these five factors - Quality, Value, Growth at Reasonable Price, Mid/Small cap, and Global.

What does the 3 in the 7-5-3-1 rule of SIP stand for?

You should overcome the three phases of the investment cycle. Disappointment Phase, where the returns are between 7-10% and you may want to book profits. The Irritation Phase is when returns are minimal compared to expectations. The Panic Phase is where returns are negative.

What does 1 in the 7-5-3-1 rule of SIP stand for?

It simply means that you must increase your SIP amount after every one year. Note, that the main idea behind SIPs is to help you invest a small amount on a consistent basis for wealth creation.