8-4-3 Rule of SIP - How Does That Work?

8-4-3 Rule of Compounding

The 8-4-3 rule is one of the strategic investment concepts describing how consistent investments, combined with the power of compounding, bring about great growth over time. It divides investment growth into three stages: initial, accelerated, and exponential.

• Initial Growth (Years 1-8): Steady Investment Growth

During the first eight years, the investment grows steadily at an average annual return of around 12%. While this may seem like a slow growth rate initially, the trick lies in consistency. Consistent contributions to your investment, with the help of compounding, add up as the years progress.

• Accelerated Growth (Years 9-12): Double Your Investment

After the first eight years, compounding becomes a more efficient force. Growth accelerates because the returns are now generating returns. Here, your investment doubles what it had gained in the first eight years due to the snowball effect of compounding. The money made during the first eight years is now used to create even more return growth.

• Exponential Growth (Years 13-15): The Snowball Effect

The investment grows exponentially in the final three years (years 13-15). This is when the growth from the past four years repeats itself. That is, your investment doubles again and will go through growth similar to the acceleration phase. The money grows exponentially because your returns are compounded. In other words, the money earned starts generating returns at a growing rate due to the snowball effect.

Advantages of the 8-4-3 Rule of Compounding

The rule of compounding works in your favour for a long investment horizon. To build a large corpus using the 8-4-3 strategy, you don't need huge investment capital. However, you should inculcate discipline and ensure that you continue reinvesting the returns. Here's how your discipline and consistency can help you with higher returns:

• Staying Consistent with Investments: The 8-4-3 rule is essential for investors to focus on long-term objectives without regard to the market's volatility. The plan of disciplined, regular investment reduces emotional investment and contributes to steady growth over the long term. Commitment is the essence of earning maximum returns and accumulating long-term wealth.
• Inflation Protection: At 12% average annual returns, investments under the 8-4-3 rule can outperform inflation to maintain their purchasing value. This ensures that the value of your investment remains intact over time, providing financial security and stability, even in times of rising costs.
• Adjusting to market trends: The 8-4-3 rule allows you to review your portfolio regularly to adjust your strategy according to the changing market conditions. Being proactive helps reduce risks and take benefits of emerging opportunities, aligning your investment strategy with the latest trends and optimising the returns.

How You Can Use 8-4-3 SIP to Grow Rs 1 Crore Corpus in 15 Years?

To build a corpus of Rs 1 crore in 15 years, you can invest Rs 21,250 per month for 15 years with a modest rate of return of 12%. Here is how your investment will grow:

Strategies to Maximise Interest/Returns with the 8-4-3 Rule

The above example shows how you can build a large corpus in just 15 years. Now, the investment can double again in the next few years more quickly, if you stay invested longer. To maximise your returns, here's what you must do:

• Start Early: One of the best strategies for getting the most out of compounding is to start as early as possible. The longer your money is invested, the greater the chance for exponential growth. Investing early allows you to use compounding to its fullest potential over time, thereby growing your wealth significantly.
• Select Right Investment Options: Choose products that promise regular compounding through mutual funds, tax-saving schemes, fixed deposits, and the Public Provident Fund (PPF). These products compound often, which heightens the total growth prospects of your investment and pays out more in the long run.
• Invest for at Least 10 Years: The real magic of compounding starts picking up speed after the tenth year. By staying invested for at least 10 years, you allow your money to grow exponentially, generating more passive income than the active contributions you initially made. This is a period of wealth accumulation.
• Invest More with Increasing Income: As your income increases, you can also increase your investments. This will help your corpus grow faster and improve the compounding effect, thus bringing larger returns in the long run. This way, you will fully benefit from market growth and compounding.
• Invest Profits: Instead of withdrawing your investment gains as dividends, reinvest them. You keep your investment growing by reinvesting your profits, as the returns will compound on both the principal and the profits. This strategy is essential for maximising long-term returns.
• Ignore Market Volatility: Focus on long-term financial goals and avoid being swayed by short-term market fluctuations. Market volatility can create noise, but keeping long-term focus helps you not to change your strategy. With time, you can smooth out market dips and capitalise on growth when the market recovers.

Conclusion

With the 8-4-3 rule, you can add excellent value to your investment strategy. It’s a strategy that thrives on the power of compounding and encourages consistent, disciplined investing. To make the most of this rule, start your SIP as early as possible, regularly review your portfolio, and stick to your long-term goals. The results may not be instant, but with patience and consistency, you'll see your money multiply over time. Remember, the journey to wealth starts with small, smart steps to make sure you are on the right path.