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The 8-4-3 rule in SIP investing shows how compounding may enhance portfolio growth over specified time periods. The rule shows that, given a consistent yearly return, an investment may double three times over 15 years due to compounding. This concept teaches investors the value of time in the market over timing the market, which is especially important when investing in equity-linked products through Systematic Investment Plans (SIPs).
Key Takeaways
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The 8-4-3 rule is based on a 15-year investment horizon and anticipates a consistent yearly return of around 12%.
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The compounding impact of the rule demonstrates three unique development phases: eight years, four years, and three years.
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The formula is often used in SIP-based equities investing to demonstrate long-term compounding.
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It is a rule and does not guarantee that your investment will double to a specific amount, as it does not consider factors like market volatility.
What is the 8-4-3 Rule?
The 8-4-3 rule describes how compounding may speed up investment growth over a 15-year period. It estimates an annual return of around 12% and breaks down growth into three phases: the first 8 years, the next 4 years, and the last 3 years. During the first eight 8 , the investment climbs steadily.
Compounding can cause the investment to double in value over the next 4 years. It is possible that it will double again in the last three years as the compounding base grows. The rule is frequently used to demonstrate how investing for a longer period of time may increase total wealth generation through compound interest.
What Is the 8-4-3 Rule of Compounding?
The 8-4-3 rule is a strategic investment approach that demonstrates how consistent investments and a healthy rate of return may cause substantial growth. According to this rule, an investment grows in three distinct phases:
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Initial Growth (Years 1-8): The 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 the next 4 years, the investment doubles, achieving the same growth it did in the first 8 years due to the power of compounding.
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Exponential Growth (Years 13-15): The investment doubles again in the final 3 years, achieving similar growth to the previous 4 years.
This rule highlights how the power of compounding can accelerate an investment's growth over time, making it an effective strategy for long-term investors.
Example of the Effect of the 8-4-3 Investment Rule
To illustrate the 8-4-3 rule, let's consider an example involving a Systematic Investment Plan (SIP) in a diversified equity mutual fund scheme. Assume the following:
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Monthly Investment: ₹12,000
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Investment Period: 15 years
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Assumed Average Annual Return: 12% p.a. (CAGR)
Approximate total value at 12% = ₹50 lakh, with total invested ₹21.6 lakh.
|
Period |
Total Investment Amount |
Approximate Total Value |
Description |
|
Years 1-8 |
₹11.52 lakh (₹12,000 x 96 months) |
₹10.03 lakh |
Initial growth phase with monthly contributions and returns |
|
Years 9-12 |
₹5.76 lakh (₹12,000 x 48 months) |
₹20.06 lakh |
Compounding intensifies, potentially doubling the investment amount |
|
Years 13-15 |
₹4.32 lakh (₹12,000 x 36 months) |
₹30.09 lakh |
Accelerated growth phase, demonstrating exponential growth potential |
Note: This example is just for illustrative purposes; the market fluctuations and other external risk factors are not factored into the calculation.
Benefits of 8-4-3 Rule of Compounding
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Staying on track with investments: The 8-4-3 rule encourages investors to remain committed to their investment plans, regardless of market volatility. This strategy allows investors to control emotions and focus on long-term financial goals. This discipline is crucial for achieving consistent growth and maximising returns over time.
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Guarding against inflation: Investments following the 8-4-3 rule act as a shield against inflation. By achieving an average annual return of 12%, investments can outpace inflation and maintain their purchasing power. This ensures that the actual value of the investment remains intact, safeguarding financial stability in the long run.
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Adapting to market changes: The 8-4-3 rule encourages regular portfolio assessments, enabling investors to make well-informed decisions in response to market changes. This dynamic approach minimises risks and capitalises on opportunities, ensuring the investment remains aligned with current trends. By adapting to market changes, investors can optimise their returns and mitigate potential losses.
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How You Can Use 8-4-3 SIP to Grow ₹1 Crore Corpus in 15 Years?
You can achieve a ₹1 crore corpus in 15 years by investing ₹20,017 monthly in an equities SIP with a 12% annualised return, leveraging the 8-4-3 compounding stages. This needs total contributions of ₹36.03 lakh, with compounding creating the remaining ₹63.97 lakh, exhibiting the rule's phases of steady base development (years 1-8), acceleration (9-12), and exponential closing (13-15). Values assume monthly compounding; real equity returns fluctuate according to market risk.
|
Period |
Cumulative Invested |
Approx. Value |
Phase Growth |
|
Years 1-8 |
₹19.32 lakh |
₹38.70 lakh |
Base build |
|
Years 9-12 |
₹29.00 lakh |
₹77.40 lakh |
Doubles prior |
|
Years 13-15 |
₹36.03 lakh |
₹100.00 lakh |
Exponential |
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Conclusion
An organised and methodical strategy for long-term investment is provided by the 8-4-3 rule of compounding, which shows how regular payments combined with the power of compounding may result in sizable wealth creation.
The 8-4-3 rule can help you become financially successful by transforming small, consistent investments into significant wealth over time with perseverance and dedication. Angel One offers a user-friendly platform to invest in mutual funds via SIP or lump sum.
