Mutual Funds: What is the 8-4-3 rule of SIP that leads to wealth creation over 15 years?

As a mutual fund investor, if you want to create wealth and achieve financial goals by making small investments via SIPs, then it is important to be aware of the 8-4-3 rule of SIP.

The rule of 8-4-3 shows how monthly investments -- when made consistently over a 15-year period -- can lead to substantial wealth creation, so long as the corpus yields a consistent 12% return each year.

This personal finance rule states that to create wealth, investors need to maintain a 15-year horizon. This time period can be further divided into three parts:

First 8 years: The corpus tends to grow slowly but steadily during the first 8 years. The returns are not too great at the start because the capital is small. Later, compounding kicks in, and this investment starts to grow.

Next 4 years: Compounding starts working more aggressively. The returns you earned in the first 8 years start delivering additional income. Consequently, you see the same growth over the next 4 years as you did in the first 8 years. The pace of compounding accelerates during these 4 years.

Final 3 years: The shortest time period (3 years) delivers the same growth as the previous 4 years because the base has grown larger in the first dozen years. This happens because of a snowball effect.

To put it simply, the incremental growth that initially takes 8 years takes only 4 years and finally only 3 years for the wealth to grow. This underscores the importance of patient, long-term investing.

₹10,000 invested via SIPs for 15 years

(Investment has given 12% annual return)

Let us understand this with an example. Suppose you invest ₹10,000 via SIPs in mutual funds that deliver a 12% return per annum. After 8 years, your investment would grow into ₹16 lakh. 

After 4 subsequent years, this investment would grow into ₹32.22 lakh, which is double the corpus at the end of 8 years. And if you continue to invest ₹10,000 for another 3 years, your total investment would accumulate to ₹50 lakh (see the table above).

Note: This content is purely editorial and for educational purposes only. It is not influenced by any commercial arrangement, product partnership, or business objective of the platform. Content powered by Mint is editorial and independent of the app’s commercial services. As such transactions, products and liabilities remain separate.

For all personal finance updates, visit here