What is 8-4-3 Rule of SIP?

Numerology has a strong following in India, with many believing that certain numbers hold the power to shape fortunes—both good and bad. While there is no magic numerological formula for investment success, one number rule, 8-4-3, might be of some help. So, what is the 8-4-3 rule of compounding and its role in wealth creation? Let’s find out.

What is the 8-4-3 rule of SIP?

Systematic Investment Plans (SIPs) allow you to put money into mutual fund schemes at regular intervals so you can build wealth over time. The 8-4-3 rule is a conceptual framework designed for SIPs. It illustrates the power of compounding over a 15-year investment period.

The 8-4-3 rule of SIP divides your investment journey into three distinct phases. The first eight years focus on steady growth, where your investments grow gradually. The next four years may see enhanced growth as your returns are compounded faster and your fund value starts to build momentum. Your investments may earn even higher returns in the final three years, leading to exponential wealth accumulation.

It is important to note that the 8-4-3 rule is merely a conceptual approach to help investors visualise how consistent investing and patience can lead to wealth creation over time. However, it is not a foolproof or established financial principle.

How does the 8-4-3 rule of compounding help in wealth creation?

The 8-4-3 rule essentially shows how the power of compounding in mutual funds can help your money grow faster over time. Let’s take an example to see how it works in action.

Suppose you invest Rs 30,000 every month through an SIP, and your mutual fund scheme gives an annual return of 12% that is compounded yearly. Here’s what your investment journey will look like:

• First eight years: This is the starting phase of your investment cycle. Since you have just entered the market, your investments will grow at a gradual pace during these years. However, if you let your capital stay invested and consistently invest for the next eight years, your wealth may potentially reach close to Rs 48 lakh by the end of this period.  
• Next four years: The next four years are when compounding starts to show its true power. During these years, your wealth can potentially double from Rs 48 lakh to Rs 96 lakh. The most important thing to note here is that it took you eight years to reach the first Rs 48 lakh. However, now you have the same amount in half the time, i.e. four years.
• Final three years: If you continue to unswervingly invest for another three years, you can watch your investment grow even more exponentially. A sum of almost Rs 1 crore can potentially grow to Rs 1.5 crore in just three years.

*Note: This return rate has been assumed for illustration purposes only. The actual return rate depends on market performance.

The final outcome: With disciplined long-term investing and some patience, you may be able to turn your monthly investment of Rs 30,000 into a substantial figure of Rs 1.5 crore in just 15 years. The momentum at which your investments grow fastens considerably as the years go by. So, the longer your money stays invested, the faster it grows, helping you create wealth.

Key considerations: While the 8-4-3 rule helps invest in a structured manner to maximise growth, investment returns are subject to market fluctuations and never guaranteed. Thus, understanding your risk appetite before investing is essential. You can consider consulting a financial advisor to tailor strategies to your circumstances, risk appetite and financial goals. 

Benefits of following the 8-4-3 rule of SIP

Here are some advantages of using the 8-4-3 rule of compounding:

• Keeps you focused on the bigger picture: The rule lets you stay committed to your long-term goals of wealth creation, helping you earn more as the years go by.
• Encourages long-term investing for better returns: The power of compounding truly unfolds over a long investment term. The longer you stay invested, the more your money grows. The 8-4-3 rule motivates you to stay invested for the long run. This allows your investments to reach their full potential.
• Builds discipline and reduces short-term temptations: Regular investing through SIPs requires consistency. The 8-4-3 rule helps you stay disciplined and keeps you from making hasty decisions based on short-term market trends.

How can you use the 8-4-3 rule of SIP effectively?

Here are some things you can do when using the 8-4-3 rule of SIP to enhance its efficacy:

• Start early for a longer investment horizon: The earlier you begin, the more time your money gets to grow. For example, beginning at 30 gives you a much longer runway than starting at 45. Even with the same monthly investment, an extra 15 years can make a massive difference in wealth accumulation.
• Stay consistent and keep investing: Growing your wealth is not just about how much you invest at the start but how frequently you invest during the entire period. When you invest regularly through SIPs, both your earlier investments and the new ones earn returns. The more you stick to your plan, the bigger your returns can get over time.
• Choose the right mutual funds: Selecting a good mutual fund scheme that aligns with your financial needs and risk appetite is essential to improve your chances of success. Research thoroughly, opt for a reputed fund house, check the fund manager’s track record, and look for schemes with lower fees to maximise your returns.

Conclusion

The 8-4-3 rule is a simple yet powerful reminder of how compounding, patience, and consistency can help you build wealth over time. While it provides a structured approach, it is important to note that market conditions can influence actual returns.

An investor education initiative by Edelweiss Mutual Fund

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