What is the 70:20:10 rule in SIP
Several methods of investing efficiently in mutual funds are well known. Of all of these methods, the 70:20:10 rule is well known. How does it work, and should you start investing by following this rule? Read on to know more.
What is the 70:20:10 rule in SIP and how does it work?
The 70:20:10 rule states that in order to consistently grow your mutual fund returns, you must invest 70% of your investment amount in low-risk investments (such as fixed deposits, government bonds and debt mutual funds), 20% of it in medium-risk investments such as balanced mutual funds, and 10% of it in “high growth potential” funds such as small-cap funds or sector-specific funds.
Benefits of using the 70:20:10 rule in SIP investing:
Here are all the key benefits of investing in SIP mutual funds using the 70:20:10 rule:
- You can mitigate overall risk by following the 70:20:10 rule: One of the major advantages of the 70:20:10 investment rule is that by following it, you can create a stable base of FD (fixed deposit), government bond and debt mutual fund investments. The 70% allocation in the 70:20:10 rule helps you ensure that a majority of your assets are not exposed to market volatility.
- Your portfolio will show a balanced growth in the future: The 20% ratio in the formula is meant for investments in medium-risk investments such as balanced mutual funds or large-cap equity mutual funds. This aspect of the 70:20:10 rule helps your portfolio remain balanced.
- You can benefit from potentially high returns by following the 70:20:10 rule: If you are following the 70:20:10 rule, you must invest 10% of your portfolio to high-risk investments such as small-cap equity funds, sector-specific funds, or direct equity mutual funds. These funds significantly boost your portfolio’s performance in a volatile market.
- The 70:20:10 rule helps you diversify your investment portfolio: This investment rule helps you diversify your investment portfolio extremely well, thereby minimising risk and helping you consistently grow your returns.
- You can preserve your capital by following the 70:20:10 rule: Since the 70:20:10 rule helps you keep your investment portfolio robust even during periods of market instability, you can easily preserve your capital by following it.
- The 70:20:10 rule is flexible: You can adjust the rule based on your individual risk tolerance, financial goals, and market conditions. This feature of the 70:20:10 rule makes it ideal for a wide range of investors.
How to rebalance your portfolio in order to maintain the 70:20:10 ratio?
After investing according to the 70:20:10 rule, you must make efforts to maintain that ratio in your portfolio. You can do this by regularly reassessing your investments (from the point of view of risk mitigation), prioritising balanced growth, and choosing investments that help you earn high returns within your investment period.
In summary,
The 70:20:10 rule requires you to invest 70% of your investment amount in low-risk investments, 20% in medium-risk investments and 10% in high-risk investments. You must use a mutual fund SIP calculator online to calculate your expected returns in the long run.
