Learn how the 8-4-3 rule can maximize your
mutual fund investments through SIP, where investments double within 8, 4, and
3 years showcasing the power of compounding. Unlock the potential of long term
wealth creation by staying dedicated to investments goals.
- Introduction
- What is the 8-4-3 Rule in Mutual Fund SIPs
- Breaking down the 8-4-3 Rule: 8 Years, 4 Years & 3 Years
- The Power of Compounding in Different Time Frames
- Example of the 8-4-3 Rule in Action
- Why Time is Crucial in SIPs
- Conclusion
- FAQs
Introduction
Have you ever thought how with just a
simple way your mutual fund investments align with your financial goals?
However, mutual fund investments through a Systematic Investment Plan
(SIP) have become a popular strategy for building long-term wealth
creation, still it can be tough for those new to the financial markets. When it
comes to mutual fund investments through SIP, there is a time tested strategy
that has the potential to compound your mutual fund investments over time. One
such popular strategy is the 𝗥𝘂𝗹𝗲 𝟴-𝟰-𝟯.This rule of compounding can provide investors a clear
framework ensuring steady growth on their investments beating the market
volatility.
One of the key reasons for this
popularity is the power of compounding—the ability of your
investments to grow exponentially over time. In this guide, we’ll explore
how the Rule 8-4-3 works and why it’s an essential concept for SIP investors in mutual funds looking to optimize their investments and capitalize on creating a
huge corpus.
What is the 8-4-3 Rule in Mutual Fund SIPs?
The 8-4-3
rule is a concept that illustrates the potential returns and growth
trajectory of mutual fund investments through SIP over a 15-year period.
If you invest through SIP into a mutual fund having a longer period goal, with
an expected annual return of 12%, this rule of 8-4-3 can double your investment
in every phase of the three time durations. It divides this time frame
into three stages as follows:
8 years:
The foundation period where compounding starts to take effect, though it might
appear slowly but steadily.
4 years:
The acceleration phase, where returns begin to snowball, thanks to compounded
growth from the earlier years.
3 years:
The peak compounding period, where the impact of compounded returns becomes
exponential, contributing the largest portion of the overall gains.
By dividing the 15-year period into these three parts,
the 8-4-3 rule highlights the exponential
growth that happens towards the latter years of your SIP investment. It’s an
effective way to understand how compounding works over time and why sticking to
a long-term strategy is essential for maximizing returns.
Breaking Down the 8-4-3 Rule: 8 Years, 4
Years, 3 Years
The 8-4-3 rule can be explained as follows:
8 Years (Slow Growth Phase): In the
first 8 years, the returns might seem modest. This is the phase where the
compounding process is still gaining momentum. You will see steady but not
extraordinary growth. However, patience during this period is crucial.
4 Years (Acceleration Phase): In
the next 4 years (from the 9th to the 12th year), your investments start
compounding on the previous returns. The snowball effect becomes more visible,
and your portfolio begins to grow at a faster rate.
3 Years (Exponential Growth): The
final 3 years (from the 13th to the 15th year) are where the compounding really
takes off. The gains from your earlier investments and compounded returns lead
to exponential growth, often contributing to the largest portion of your
overall returns.
The 8-4-3 rule is an ideal
way to visualize the importance of long-term investing. The magic of
compounding truly shines in the last few years, where patience is rewarded with
significant wealth accumulation.
The Power of Compounding in Different Time
Frames
Let’s look at how compounding affects your investment during the
8-4-3 phases of the 15-year period:
First 8 Years:
During this time, your returns might not seem substantial, but this is when the
groundwork for future growth is being laid. It’s important to stay invested and
continue making SIP contributions, as the power of compounding needs time to
manifest.
Next 4 Years: By
this time, the returns from the previous 8 years start compounding at a faster
rate. In this phase your investments will see a similar growth like the
previous 8 year. The growth becomes more noticeable, and you start seeing the
benefits of staying invested long-term.
Final 3 Years: This
is where the real magic happens. The compounded returns from the earlier years
grow exponentially, resulting in significant wealth accumulation. These last 3
years can contribute more to your total returns than the entire first 8 years.
Example of the 8-4-3 Rule in Action
Let’s consider an example to demonstrate the 8-4-3 rule:
Scenario: You invest ₹10,000 per month
in an SIP with an average annual return of 12% for 15 years:
|
Time Frame |
Investments |
Corpus (Rs.) (Approx) |
|
1 st
8 years |
₹ 9.6 lakh |
₹ 15.7 lakh |
|
Next 4 years |
₹ 4.8 lakh |
₹ 30.1 lakh |
|
Next 3 years |
₹ 3.6 lakh |
₹ 50.2 lakh |
In the first 8 years, your investment of ₹9.6 lakhs grows to ₹15.7 lakhs. By the end of the 12th year, your total investment of ₹14.4 lakhs grows to ₹30.1lakhs, but the real exponential growth happens in the last 3 years, where your total portfolio value reaches around ₹50 lakhs.
This example highlights the snowball effect of compounding
during the last few years of the investment period, proving why patience and
long-term investing are key to success.
Why Time is Crucial in SIPs
The 8-4-3
rule teaches us that time is the most critical factor in
maximizing the power of compounding. The longer you stay invested, the more
your returns will grow, thanks to the compounding effect. Short-term investors
miss out on the exponential growth that occurs in the later stages of the
investment period.
If you withdraw your investment too early, you may see only
modest gains and miss the significant returns that occur during the final years
of the 15-year period.
Conclusion
The 8-4-3
rule in mutual fund SIPs provides a clear and practical
understanding of how compounding works over a 15-year investment period. By
dividing the time frame into three distinct phases—8 years, 4 years, and 3
years — it illustrates the importance of patience and long-term investing to
achieve exponential growth. For those committed to regular SIP contributions,
the 8-4-3 rule offers a roadmap to realizing the full potential of their mutual
fund investments through the power of compounding. So, here is the learning
that long-term investment can create wealth. Happy reading, Keep
investing.
FAQs
1. What is the 8-4-3 Rule in SIP?
The 8-4-3 rule is a strategy that divides a 15-year SIP
investment period into three stages: 8 years (slow growth), 4 years
(acceleration), and 3 years (exponential growth), emphasizing the power of
compounding.
2. How does the 8-4-3 Rule Benefit Investors?
The rule highlights the importance of staying invested for the
long term to maximize the compounding effect, especially during the final 3
years, where returns grow exponentially.
3. Can I Apply the 8-4-3 Rule to Shorter
Investment Periods?
The 8-4-3 rule is designed for a 15-year period, as compounding
takes time to show significant results. Shorter periods may not fully benefit
from exponential growth.
4. What is the Ideal Return Rate for the
8-4-3 Rule?
The rule typically assumes an average annual return of around
12%, but actual returns depend on the market and the type of mutual funds you
invest in.
5. Should I
increase my SIP contributions over time?
Yes, increasing your SIP contributions over time can enhance the
compounding effect, leading to even greater returns in the long term.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
