What is the 8-4-3 rule of Mutual Funds?
What is the 8-4-3 rule of Mutual Funds?
Investing money for the future doesn’t have to be complicated. Systematic Investment Plan (SIPs) has become popular and appreciated for their simplicity and long-term wealth-building potential. But in a world where markets can be unpredictable, having a clear plan is super important. That’s where the 8-4-3 rule comes in as an easy-to-follow guide that makes your SIPs work even better. Let’s continue this blog and firstly gain some knowledge about the power of compounding.
What is the power of compounding in mutual funds?
The power of compounding is a fundamental principle that can significantly amplify the growth of investments in Mutual Funds over time. Compounding essentially means earning returns not just on the initial investment but also on the accumulated returns from previous periods. This compounding effect has a great impact, especially when investments are allowed to grow over an extended period.
As your mutual fund investment generates returns, those returns get reinvested along with your principal amount. Subsequently, future returns are calculated not only on your initial investment but also on the reinvested returns. Over time, this compounding process can lead to exponential growth in the value of your investment, and the longer your money stays invested, the greater the potential for compounding to significantly boost your returns.
The 8-4-3 Rule’s Magic of Compounding
One of the strategies for compounding money through mutual funds is to use the 8-4-3 rule, where the compounding effect grows exponentially. In the initial 8 years, the compounding effect shows good results, but its speed increases in the next 4 years and super-exponentially in the following 3 years.
Let’s understand with the example-
Consider making a monthly investment of Rs. 30,000 and earning a 12% annual return. Let us examine the interesting pattern of the value of your portfolio:
First fifty lakhs: Eight Years of being patient
Although it may seem like a long wait, your investment increases your investment increases to the first Rs.50 lakhs after 8 years. It takes some patience to get beyond this early period when compounding starts to show its magic.
Reducing the time to 4 years for the second Rs. 50 lakh
Remarkably, it takes just 4 years, half the period, for the next Rs. 50 lakhs to enter your portfolio. Thanks to the compounding effect gathering momentum, this acceleration has occurred.
A speedy three years for the third Rs. 50 lakhs
Even quicker, the third time of Rs. 50 lakhs arrive in only three years. Tour money is now increasing more quickly, demonstrating compounding’s true power.
20th Year: Nearly Annually Adding Rs. 50 Lakhs
When you reach the 20th year you almost double your money every year by adding Rs. 50 lakhs. The real power of compounding.
Let’s understand this with the simplest example-
Consider this scenario: if you invest Rs. 500 per month in an equity fund through SIP for 4 years, assuming an average SIP return of 10%, your gains will amount to Rs. 5,606. Now, if you decide to continue your SIP for an additional 2 years, your gains increase significantly to Rs. 13,465.
The difference in earnings between the first 4 years and the next 2 years is Rs. 7,859. This showcases the power of compounding. The longer you invest, the more compounding works in your favor, leading to greater returns over time. It emphasizes the importance of staying invested for an extended period to harness the full potential of compounding and maximizing your gains.
Bullet Points
- Your invested money per month of 30,000 with an average return of 12%
- Your first Rs. 50 lakh rupee will reach within 8 years
- Next Rs. 50 lakh will reach only 4 years
- Than next Rs. 50 lakh will reach in 3 years
- By the 20th year, consistently added almost Rs. 50 lakh each year.
- Demonstrates the power of compounding and disciplined investing.
Benefits of the 8-4-3 rule
Disciplined Investing
The 8-4-3 Rule is like a guide that helps you stay on track with your investments. It's all about being disciplined, which means sticking to your plan for a long time. This disciplined approach helps avoid emotional decision-making during market fluctuations.
Inflation Alignment
The annual 4% increase safeguards investments against the effects of inflation, ensuring that the real returns maintain their value over time.
Dynamic Portfolio Management
Regular reviews empower investors to make informed decisions allowing them to adapt their portfolio to changing market dynamics, minimizing risks and maximizing opportunities.
Conclusion
In conclusion, the 8-4-3 rule for mutual funds provides a clear path for investors using Systematic Investment Plans (SIPs). Compounding, disciplined investment, and dynamic portfolio management are all used in this rule. The significant path is highlighted by the example of investing Rs. 30,000 per month at a 12% annual return: gradual growth to Rs. 50 lakhs in 8 years, followed by faster gains and stable additions of Rs. 50 lakhs yearly by the 20th year. This disciplined approach, coupled with adaptability to inflation and market changes, positions investors for long-term financial success. Additionally, a simple SIP example of investing Rs. 500 per month for 6 years underscores the significant returns achieved by extending the investment horizon. The 8-4-3 Rule is more than a guideline it's a powerful strategy to unlock the full potential of compounding for a robust financial by Online SIP in mutual fund schemes.
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