What is the 8-4-3 Rule of SIP and How Can it Benefit You?
Systematic investment plans, or SIPs, have become the go-to vehicle for investing in mutual funds. As per data from the Association of Mutual Funds in India (AMFI), there are about 10.2 million SIP accounts through which investors invest regularly in Indian mutual funds. The 8-4-3 is among the several strategies you can deploy to get the best out of your SIP plan. What’s this strategy? Let’s find out.
What’s the 8-4-3 SIP Rule?
The 8-4-3 SIP rule is a strategy demonstrating the growth of your investment in an SIP plan over time through the power of compounding. As per this strategy, your SIP investment grows in three distinct phases:
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Initial Growth Years (1 to 8): Your investment grows steadily over the first 8 years at an average annual return of 12%.
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Accelerated Growth Years (9-12): In this growth phase, your investment doubles and achieves the same growth in the first 8 years thanks to the power of compounding.
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Exponential growth (13-15): In the final three years, your investment doubles once more and achieves the growth of the past four years.
Let’s see this rule in action. Suppose you start a monthly SIP of ₹10,000 in a mutual fund offering 12% annualised returns , and your investment duration is 15 years. Here’s how your corpus would grow as per this rule:
| Tenure | Invested Amount (in ₹) | Gain (in ₹) | Corpus (in ₹) |
|---|---|---|---|
1-8 Years | ₹9.6 lakhs | ₹6.1 lakhs | ₹15.7 lakhs |
9-12 Years | ₹14.40 lakhs | ₹16.4 lakhs | ₹30.8 lakhs |
13-15 Years | ₹18 lakhs | ₹29.59 lakhs | ₹47.59 lakhs |
As you can see, in the first 8 years, your investment rose to over ₹15 lakhs, while it took half the time for the corpus to add another ₹15 lakhs. In the final three years, the corpus added over ₹15 lakhs.
Benefits of SIP Investments and the 8-4-3 Rule
Given below are the SIP benefits and implementation of the 8-4-3 rule:
- Allows You to Start Small
Among the several SIP benefits is the flexibility to start small. In other words, you don’t need a sizeable investible surplus upfront to invest in a SIP plan. You can start with as little as ₹500 or ₹1000 per month. This ensures financial inclusion without the need to stay committed to a large amount of money every month.
- Harness the Power of Compounding
Implementing the 8-4-3 rule in your SIP plan can help you harness the power of compounding. Compounding, touted as the world's eighth wonder, has a multiplier effect on wealth creation. Through compounding, you invest the interest earned along with the original investment, and this balloons your corpus in the long run.
- Promotes Long Term Investment
Long-term investment is one of the major SIP benefits. When you stay committed to your investment for a long period through SIPs by following the 8-4-3 rule, you can navigate market volatility with ease and benefit from rupee cost averaging. In rupee cost averaging, you earn more units when markets are down and vice versa. Eventually, it helps average out your investments.
- Helps Counter Inflation
Inflation has a decompounding effect on wealth, and it brings down the value of money over time. By riding on the power of compounding by implementing the 8-4-3 rule, you can counter inflation and get inflation-indexed returns in the long term. This helps you meet long-term goals with prudence.
Conclusion
The benefits of an SIP plan go beyond investing only in mutual funds. They help imbibe disciplined savings habits, crucial for long-term wealth creation. Topping your SIP plan with the 8-4-3 rule is an icing on the cake that can help you benefit from the power of compounding in the long run.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
