What is the 8-4-3 Rule of SIP & How Does That Work?

SIP has been a go-to investment option for investors. Its major features, like disciplined investing, affordability, and the power of compounding, are the reasons for its popularity. While the basic idea of compounding is easy to understand, the 8-4-3 rule can help get a better idea of how compounding works in SIP to quickly grow the capital.

Read on as we explore how the 8-4-3 rule of SIP works and how investors benefit from it.

What is SIP?

Systematic Investment Plan, SIP, is a systematic investment tool where investors get to invest monthly in fixed amounts. This amount goes into purchasing mutual fund units at the NAV.

• During a bear market, when NAVs are low, you buy more units.

• During a bull market, when NAVs are high, you buy fewer units.

This regular investment behaviour, or rupee cost averaging, guarantees that you are not bothered about timing the market. SIP investment, in the long run, lowers the effect of volatility and builds wealth through compounding power.

Flexibility is another benefit. You have the option to pick SIPs in equity, debt, sector or hybrid funds, as per your objective.

The 8-4-3 Rule of Compounding

The 8-4-3 rule is a simple way to visualise SIP growth in three stages:

• Early Growth (Years 1-8): This phase generates regular returns, which might seem slow. That said, the consistency helps create a strong foundation for compounding.

• Increased Growth (Years 9-12): Compounding starts snowballing. The returns earned during the initial eight years now begin to earn their own returns.

• Exponential Growth (Years 13-15): Compounding picks up pace in the final three years. Previous years’ gains multiply, resulting in massive growth.

Why is the 8-4-3 Rule Important?

• Long-Term Investment Focus: Your focus remains on the long-term objective, ignoring temporary volatility.

• Leverage Compounding: Your investments earn returns, and the returns start to earn money as well.

• Inflation Protection: With a steady average annual return, SIP investments can comfortably outstrip inflation.

• Flexibility to Rebalance: You can review your SIP portfolio after a time period you define and reallocate your investments based on shifting market conditions.

How the 8-4-3 Rule Works in Numbers

Let’s say, you invest ₹20,000/month at 12% yearly interest in a 15-year-long mutual fund SIP.

Here's how the corpus builds up:

After 15 years, your entire investment is ₹36,00,000 (₹20,000 × 12 × 15), yet the corpus at maturity rises to approximately ₹1.26 crore, three times the initial amount.
This is the power of compounding at the rate of 8-4-3.

Benefits of the 8-4-3 Rule

Inculcates discipline and regularity in investment.

• Instils discipline and regularity in investing.

• Helps you ignore temporary fluctuations by observing long-term results.

• Helps you build capital without having to invest huge amounts of initial capital.

Conclusion

The compounding effect has numerous benefits, making SIP a valuable investment option. An SIP investment helps investors learn financial discipline and also allows them to maximise their investment returns even when they start with a significantly smaller amount. The 8-4-3 rule provides a closer look at precisely how and when compounding occurs and at what speed. It encourages you to stick to the SIP, especially in the later years when compounding takes the highest pace.

Disclaimers:

SIP does not assure a profit or guarantee protection against loss in a declining market. The illustration mentioned above is not based on any judgements of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and / or safeguard of capital. Information gathered and material used in the above illustration is believed to be from reliable sources. ABSLAMC however does not warrant the accuracy, reasonableness and / or completeness of any such information. The illustration do not purport to represent the performance of any security or investments.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.