The 8-4-3 Rule Of SIP: How It Works and Its Benefits

Systematic Investment Plans aka SIPs have made investing in mutual funds a lot more accessible and affordable for everyone. This investment vehicle gives you a disciplined approach to investing while benefitting from the power of compounding that leads to exponential growth in the long term. 

When you invest, it is always important to know how your investments will grow over time. When it comes to mutual funds, the 8-4-3 rule of compounding helps you visualise how your returns grow over the years. Let’s see what the 8-4-3 rule is and how it works. 

What is the 8-4-3 Rule?

The 8-4-3 rule of SIP is an illustration of how consistent and long-term investment can benefit from the power of compounding. It gives you an idea of how your investments might grow over time based on three phases.  

Steady Growth Phase (First 8 years): In this initial phase, your investment growth is slow and steady at an annual return rate of about 12%. Your investments through SIP slowly increase as your contributions start to accumulate and generate wealth. This lays the foundation for the future phases of growth. 

Accelerated Growth Phase (Next 4 years): In this phase, your investment grows at an accelerated phase. The effect of compounding becomes more apparent in this phase as the returns you earned in the first 8 years begin to generate further returns. 

Exponential Growth Phase (Last 3 years): In the final 3 years, you experience exponential growth. The cumulative effect of the compounding over the previous years growth the value of your investment and allows you to generate returns a lot faster. 

How Does the 8-4-3 Rule Work?

Let’s understand how the 8-4-3 rule works based on this numerical example. Imagine you start investment in a mutual fund through SIP. Your SIP amount every month is Rs 1000 and the initial rate of return is 12%. For simplicity, we'll approximate the growth.

Years 1-8 (Steady): With Rs 1000 monthly contributions and a 12% annual return, the investment grows to roughly Rs 161,527.

Years 9-12 (Accelerated): The growth rate doubles. This increased return applied to the growing principal results in the investment reaching approximately Rs 498,821.

Years 13-15 (Exponential): The growth rate quadruples. This dramatic increase on the already substantial amount leads to a final investment value of around Rs 2,127,831.

What are the Benefits of the 8-4-3 Rule?

The 8-4-3 rule simplifies the complex principle of compounding for investors who are not financial experts. Here are some  benefits of the 8-4-3 rule:

1. Disciplined Investments

The 8-4-3 rule encourages you to stay disciplined in your investments as it helps you visualise the benefit of consistent contributions over time. 

2. Encourages Long-Term Investing

The 8-4-3 SIP rule encourages investors to opt for a long-term horizon. This allows them to ride out market fluctuations and benefit from the gains that materialise in the later years of their investment. 

3. Simplifies Compounding

The concept of compounding in SIP investments can be quite complex for beginners to fully grasp. The 8-4-3 rule simplifies this and helps investors understand how their earnings generate further earnings, leading to exponential growth in the later stages.   

To Sum Up

The 8-4-3 rule can be a motivator for you to stick to your long-term investment plans and reap the rewards of compounding. While planning your investments is essential, it is also important to make these investments through reliable platforms. 

Tata Capital Moneyfy is a trusted investment platform that allows you to invest in mutual funds and other investment vehicles to grow your wealth. With an intuitive platform, bouquet of tools and services and resources to help you invest better, Tata  Capital Moneyfy is a one-stop-shop for all your financial needs. 
To learn more about investing through Tata Capital Moneyfy, visit the Moneyfy website or download the app today!