When it comes to investing in mutual funds, having a clear strategy can make all the difference between average returns and exceptional gains. One such mutual fund strategy is the 8-4-3 Rule of SIP, which can guide investment decisions and improve portfolio performance. The strategy is based on the power of compounding. Following this rule can significantly enhance your return potential. So, let’s understand the 8-4-3 rule in detail and its benefits.
What is Power of Compounding?
The power of compounding is a fundamental concept in investing that can boost the returns you earn from your mutual fund investments over time. Compounding suggests that you earn returns on both your initial investment and the returns that have been added to it.
For example, if you invest ₹5,000 per annum at the rate of 10%, it means your investment grows by ₹500 in the first year. If you reinvest this entire amount, then in the second year your principal investment would be ₹5,500, resulting in a return of ₹550. Therefore, we can see with time, your returns from investment will continue to grow.
So, the longer you invest, the more significant will be the growth of your investments. By choosing to start early and increasing your contributions regularly, you can leverage the principle of compounding, which can help you achieve your financial goals more effectively.
What Is the 8-4-3 Rule of SIP?
The 8-4-3 rule of SIP is a straightforward strategy that demonstrates how investments increase over time through the power of compounding. If you consistently invest a fixed amount into a mutual fund over the long term, with an expected annual return of 12%, the 8-4-3 rule can significantly benefit you. Here is how it works:
Initial Growth (1-8 years): Your investment will see a steady growth in the first eight years.
Accelerated Growth (9-12 years): In the next four years, your investments will see a growth similar to what it witnessed in the first eight years i.e. in half the time.
Exponential Growth (13-15 years): In the final three years, your investment again grows at the same pace it did in the last four years.
Now, let’s understand how it applies to mutual funds with the help of an example.
Example of 8-4-3 Investment Rule
Let’s imagine that an investor starts a SIP in a mutual fund, with the following assumptions:
Monthly Investment Amount: ₹10,000
Investment Duration: 15 years
Assumed Average Annual Return: 12%
| Tenure | Amount Invested (₹) | Gain (₹) | Corpus (₹) |
| 1-8 years | 9,60,000 | 6,10,000 | 15,70,000 |
| 9-12 years | 14,40,000 | 16,40,000 | 30,80,000 |
| 13-15 years | 18,00,000 | 29,59,000 | 47,59,000 |
This example clearly illustrates the 8-4-3 rule of SIP in mutual funds. In the first eight years, the investment rose to ₹15.70 lakh. Meanwhile, it took the corpus half the time i.e. four years to add another ₹15 lakh, making investment rise to ₹30.80 lakh. And in the final three years, the corpus added over ₹15 lakh. You can use INDmoney’s SIP calculator to easily calculate the returns on your investments.
Time and consistency are two key pillars of investing. If you invest in a disciplined manner over a long period of time, you can ensure massive wealth creation. This 8-4-3 rule of investing ensures that you remain committed to your investment plan and are undeterred by stock market fluctuations. This strategy will allow you to not be swayed by your emotions and stay focussed on achieving your financial goals.
Strategies to Maximise Returns From Mutual Fund Investments
While the rule of 8-4-3 is a powerful strategy, follow these steps to earn the best possible returns on your investments:
Start Early: Time is a crucial factor in the market. If you start investing early and continue for a long time, it will allow your investments to grow substantially. Investing early can help you maximise the benefits of compounding.
Disciplined Approach: Make sure you follow a disciplined approach to investing and stay invested during different market cycles. Investors should focus on long-term goals and should not be swayed by short-term market fluctuations. This will help them maximise their returns.
Increase Investments: As your income increases, try to increase your SIP contributions as it can facilitate the growth of your investments and help you earn higher returns.
Asset Allocation: Ensure you strategically spread your investments across different asset classes that meet your risk appetite and goals. Allocating to equities can ensure long-term growth.
Cost Control: The cost of investing should be an important consideration as it can lower the returns on your investment. Consider the expense ratio of the fund before investing. Opt for passive funds as they have lower costs attached to them. Even within active funds, compare the returns and expense ratio of funds to choose the best possible option.
Conclusion
The 8-4-3 rule of mutual fund investing clearly shows how investing small amounts over a long time can help you experience the power of compounding. This approach to investing sets them on the path to achieving long-term financial goals. At INDmoney, you can easily invest in the best mutual funds and kickstart your financial journey. You can choose funds based on your risk profile, goals and investment duration.
FAQs
What is the 8-4-3 rule of SIP?
According to this rule, small SIP contributions over a long time can benefit from compounding. As per the rule, your investment will grow steadily in the initial eight years; in the next four years, it will grow at the same pace as the initial eight years; and lastly, in the final three years, it will see similar growth as the last four years.
Can market volatility affect the 8-4-3 rule?
Mutual fund returns are influenced by stock market movements. Therefore, investors must understand that there can be periods of low or negative returns which could impact the speed of compounding. This rule is a general overview of how compounding increases over time.
Does the 8-4-3 rule apply to all investments?
This rule applies to investments that provide high returns and benefit from compounding. It works best with equity mutual funds.
What kind of returns can you expect from the 8-4-3 rule?
This rule assumes a 12% annual return, with your investment doubling every eight, four and three years.