Investing in mutual funds through Systematic Investment Plans (SIPs) has gained immense popularity due to its ability to mitigate market risks over the long term. However, even in the seemingly secure SIP route, investors are only partially immune to market fluctuations. Here, we delve into the time-tested 70:20:10 rule, a formula that can potentially safeguard your mutual fund investments and minimize the impact of market volatility.
Understanding the 70:20:10 Rule:
The 70:20:10 rule guides investors in allocating their mutual fund investments strategically. 70% is earmarked for large-cap mutual funds, known for stability due to their association with financially robust companies. 20% is directed towards mid-cap funds, offering a balanced mix of stability and growth potential. The remaining 10% is allocated to small-cap funds, acknowledging their vulnerability to market fluctuations but recognizing their potential for higher returns.
Risk Mitigation Strategy:
The 70:20:10 rule is a risk mitigation strategy that prevents overexposure to volatile segments. In times of market turmoil, the stability of large-cap investments helps cushion the impact, and the ability to buy more NAVs through SIPs during market slumps aids in eroding losses as markets recover.
SIP Investment Timing:
SIP investors benefit from market consolidation periods, acquiring more units with lower prices. Conversely, during market upswings, the compounding effect accelerates returns, amplifying investor gains.
Financial planners advocate an investment horizon of 8-10 years for equity mutual funds, aligning with the historical trend of SIPs proving effective in the long run. The increasing popularity of SIPs is evident from the substantial growth in contributions, crossing Rs 1 trillion in FY24, and the rising number of SIP accounts, reaching 7.44 crore in FY23-24.
The 70:20:10 rule emerges as a prudent strategy for SIP investors, offering a balanced approach to navigating the market’s uncertainties. By adhering to this rule, investors can safeguard their mutual fund portfolio, minimize losses during market downturns, and capitalize on opportunities for wealth creation over the long term.