Investing can often seem overwhelming, especially for those new to the financial markets. However, Investing is a crucial component of building long-term wealth and securing financial independence. By consistently setting aside funds and allowing them to grow, investors can capitalize on the power of compounding and navigate market fluctuations with a disciplined approach. Among various strategies and rules, the 8-4-3 Investment Rule stands out as a straightforward approach to long term wealth creation.
Here, we’ll break down what the 8-4-3 rule entails, how it works, and its potential benefits for investors.
– What Is the 8-4-3 Rule of SIP?
The 8-4-3 rule of SIP 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 15%, the 8-4-3 rule can significantly benefit you.
Initial Growth (1-8 years): The investment grows steadily over the first eight years at an average annual return of 15%.
Accelerated Growth (9-12 years): It will achieve the same growth as the first 8 years, i.e., similar accumulation of wealth, but in half the time (4 years). Due to the power of compounding.
Exponential Growth (13-15 years): The corpus will again match the previous growth but in 1 year less (3 years compared to 4 years previously).
This accelerated wealth accumulation can be attributed to compound interest and regular investments. Under compounding, the returns earned each year are automatically reinvested to start generating returns of their own over the following period. So, the longer the timeframe, the more powerful the multiplier effect of compounding becomes.
– Let’s see this rule with an example:
Imagine you have started the systematic investment plan in a diversified equity mutual fund scheme on a monthly basis:
Monthly Basis: 15,000
Assumed Expected Return: 15% p.a.
Investment Period: 15 years
| Tenure | 1-8 Years | 9-12 Years | 13-15 Years |
| Investment during the period (Rs. Lacs) | 14.40 | 7.20 | 5.40 |
| Cumulative Investment (Rs. Lacs) | 14.40 | 21.60 | 27.00 |
| Returns for the period (Rs. Lacs) | 13.49 | 25.45 | 35.59 |
| Cumulative Returns (Rs. Lacs) | 13.49 | 38.94 | 74.53 |
| Corpus Value (Rs. Lacs) | 27.89 | 60.54 | 101.53 |
| Addition to Corpus (Rs. Lacs) | 27.89 | 32.65 | 40.99 |
This clearly illustrates the 8-4-3 rule of SIP in mutual funds. In the first eight years, the investment rose to Rs.27,89,049. Meanwhile, it took the corpus half the time i.e. four years to add another Rs. 32,64,720 lakhs, making investment rise to Rs. 60,53,769 lakhs. And in the final three years, the corpus raised up to 1cr. Consistency is the main 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 focused on achieving your financial goals.
– Strategies to maximize returns on Mutual Fund
Diversification: Don’t keep all your investment in same asset class. Diversify across asset classes (equity, debt, gold) and market capitalizations (large-cap, mid-cap, and small-cap) to mitigate risk.
Research & Analyse: Research different mutual fund options. Look at factors like expense ratio, past performance, and the fund manager’s track record.
Asset Allocation: Strategically allocate your investments across different asset classes based on your risk tolerance and goals. Rebalance your portfolio periodically to maintain the desired asset allocation.
Review Regularly: Periodically review your portfolio performance and adjust your strategy as needed based on your goals and market conditions.
Conclusion:
It’s ideal for investors with a moderate risk tolerance who want a “set it and forget it” strategy to build wealth over time. Also getting to the hefty amount like Rs.1 crore is tough but staying invested & starting early can get you there. It’s essential to evaluate your financial goals, risk tolerance, and investment timeline before committing to a specific mutual fund structure. Thus, it’s always recommended to consult with a financial advisor to determine if it aligns with your broader financial plan.
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The article is authored by Mr. Saurabh Gosavi from Team RichVik.