Summary
Learn about the 8-4-3 rule of compounding, where investments double within 8, 4, and 3 years, showcasing exponential growth. It emphasizes staying dedicated to investment plans, guarding against inflation, and adapting to market changes.
In finance, people know that it pays to take interest on interest because this can lead to rapid growth of investments. However, the 8-4-3 guideline is another interesting concept that could show how such a situation looks in practice. You may find out when your investment could start to grow rapidly due to this phenomenon.
Power of Compounding
Essentially, this means that you will be earning on both your investments and their reinvestments. Supposing that you invested ₹10,000 p.a. at the rate of 9%; it means that it grows ₹900 in returns earned. If this amount is withdrawn instead of being reinvested, then in the second year you will gain 10,900 x 0.09 = ₹981. This trend goes on and on until one ends up with a lump sum. To grow more exponentially, it is better the longer you invest. Getting started early and increasing contributions regularly demonstrate compounding’s incredible potential to make wealth grow exponentially.
What is the 8-4-3 rule of compounding?
The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up. Eventually, this would be seen within 15 years as its value doubled again after 3 more years. This intertwined influence highlights the extent to which an ongoing compounding growth will build up wealth magnitudes more rapidly with time.
To maximize your chance of high savings in the future, take post-tax returns into account for long-term capital gains when making investments. It also means how compound interest helps one create wealth since it seems as if reinvested earnings consistently generate exponential growth just as when rolling a snowball uphill.
How does the 8-4-3 rule of compounding work?
For instance, if you invest a lump sum of ₹10,000 every month in an instrument that earns 12% interest per annum and is compounded yearly, you will get your first ₹16,15,266 lakh in eight years.
Here comes the magic of compounding. It will take only half the time, i.e., four years, for the next ₹16 lakh. To save the third ₹16.15 lakh, it will take you only three years. So, in 15 years, you can save ₹50 lakhs.
At the end of the 21st year, you will save ₹1 crore, it takes only 5 years to double your ₹50 lakhs to ₹1 crore.
Do keep in mind here that we take annual compounding, that is interest is calculated once a year.
| The table illustrates the 8-4-3 rule of compounding | |
|---|
| Expected return | 12% |
| Monthly SIP amount | ₹ 10,000 |
| Corpus after 8 years | ₹ 16,15,266 |
| Corpus after next 4 years (Total 12 years) | ₹ 32,22,521 |
| Corpus after next 3 years (Total 15 years) | ₹ 50,45,759 |
Benefits of 8-4-3 rule of compounding
Staying on Track with Investments
Have you ever heard about the 8-4-3 Rule? This is like a trusted guide that can enable a person to adhere to his investment plan for many years. The most important thing here is to be dedicated. It implies that you are supposed to adhere to your strategy no matter how volatile the market may sometimes be. Through this way, emotions are kept at bay and one will remain focused on what he wants to achieve.
Guarding Against Inflation
Just think of your investments as a shield to defend you against inflation. They are effectively protected from the deteriorating impacts of increasing prices by this annual 5% growth rate, which assures that their actual returns can continue to purchase the same values even over time thus safeguarding your financial stability.
Adapting to Market Changes
Compare your investment portfolio to a garden that demands regular care. Regular check-ins imply that we give ourselves power for making informed choices. And through this dynamic methodology, you can fine tune it by matching the changing market conditions with the current trends. This is all rooted in minimizing risks as well as taking advantage of chances that come up.
Knowing well the 8-4-3 principle allows an insight into the possibilities of consistent investments that proliferate. Thus, it is possible for an investor to safeguard against inflation, reduce risk and capitalize on markets through following it in making long term investments. Key to this criterion is taking time to amass wealth by being patient while remaining disciplined regardless of the market condition.
FAQs
What is the 8-4-3 rule of compounding? In the 8-4-3 strategy, the average return of a particular investment amount for 8 years is 12 per cent/annum, while after that time period, it will take only half of that horizon, i.e., 4 years (total 12 years), to get a return of 12 per cent.
What is the 8 4 3 rule of compounding? ›
What is the 8-4-3 rule of compounding? In the 8-4-3 strategy, the average return of a particular investment amount for 8 years is 12 per cent/annum, while after that time period, it will take only half of that horizon, i.e., 4 years (total 12 years), to get a return of 12 per cent.
What happens if I invest $10,000 a month in SIP for 5 years? ›
Here is a fund which has delivered superior returns over a five year period outperforming the index it is benchmarked against. An investment of Rs 10,000 per month via systematic investment plan (SIP) route over a period of five years in Quant Small Cap Fund's growth is worth nearly Rs 19 lakh today.
Which SIP is best for $10,000 per month? ›
Top 10 SIP plans for 10,000 rupees per month in 2024
| Mutual Fund | Risk Involved | AUM (₹ Crs) |
|---|
| Canara Robeco Emerging Equities Fund | Very High | 19,902 |
| Motilal Oswal Focused Fund | Very High | 1,842 |
| PGIM India Flexi Cap Fund | Very High | 5,928 |
| Mirae Asset Large & Midcap Fund | Very High | 33,295 |
6 more rowsFeb 16, 2024
Consider investing Rs 15,000 per month for 15 years and earning 15% returns. After 15 years, the total wealth will be Rs 1,00,27,601 (Rs. 1 crore). According to the compounding principle, if we implement these very same returns and contributions for another 15 years, the amount we accumulate grows enormously.
How long will it take for $10000 to double at 8 compound interest? ›
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
What is the golden rule of compounding? ›
The earlier you invest, the more time your money has to grow into a nice sum. Starting early takes advantage of compound interest — the name given to the returns you make on money that you previously earned as interest. In other words, your money earns returns on its returns.
What happens if I invest 20 000 a month in SIP for 5 years? ›
Value of INR 20,000 per Month in SIP
If an investor invests INR 20,000 per month for a period of 5 years, he will be able to earn INR 17 lakh as the overall income generated from SIP. The total investment in the tenure of 5 years will be only INR 12 lakh.
What happens if I invest 30000 a month in SIP for 5 years? ›
If you invest ₹30,000 per month in a Systematic Investment Plan (SIP) for a period of 5 years, assuming an average annual return of 12% on your SIP investment, using the SIP calculator, your returns will be: Your invested amount will be: ₹18,00,000. Estimated Returns will be will be: ₹6,74,591.
What happens if I invest $1,000 in SIP for 10 years? ›
You also have n = 10 years or 120 months. FV = Rs 1,84,170. So, the future value of a SIP investment of Rs 1,000 per month for 10 years at an estimated rate of return of 8% is Rs 1,84,170.
There are eight large cap mutual funds which have delivered over 40 percent return in the past one year. These include Quant Large Cap Fund, Bank of India Bluechip Fund, JM Large Cap Fund and Nippon India Large Cap Fund, among others.
How much is 50000 monthly SIP for 5 years? ›
How much is Rs.50,000 per month SIP for 5 years? If you invest Rs. 50,000 per month in a SIP for 5 years, the total investment would amount to Rs. 30 lakhs. Assuming an average annual return of 12%, the estimated corpus at the end of 5 years would be approximately Rs. 40.6 lakhs.
How much is $5000 for 5 years in SIP? ›
How much is Rs. 5,000 for 5 years in SIP? If you invest Rs. 5,000 per month through SIP for 5 years, assuming 12% return. The estimate total returns will be Rs. 1,12,432 and the estimate future value of your investment will be Rs. 4,12,431.
What if I invest $1,000 a month in mutual funds for 20 years? ›
If you invest Rs 1000 for 20 years , if we assume 12 % return , you would get Approx Rs 9.2 lakhs. Invested amount Rs 2.4 Lakh.
What is the 15x15x15 rule in SIP? ›
It says that if you invest Rs. 15,000 per month via SIP in an equity mutual fund that is capable of generating an average return of 15%, you are most likely to become a crorepati in 15 years (as stated in the example above). Your total investment in fifteen years = Rs. 15,000 x 180 months = Rs. 27,00,000.
How much do I need to invest to be a millionaire in 15 years? ›
But in order to be a millionaire via investing in 15 years, you'd only have to invest $43,000 per year (assuming a 6% real rate of return, which accounts for inflation). I know, I know – only $43,000 per year. No big deal. *From this point forward, the average real rate of return we'll be assuming is 6%.
How to quickly save RS 1 crore use this 8 4 3 rule of compounding? ›
- After 8 years: You'll have approximately Rs 33.37 lakh. - After the next 4 years (total 12 years): Your corpus will reach Rs 66.24 lah. - By the 21st year, your savings will grow to Rs 2.22 crore. - And by the 22nd year, you'll need just one more year to accumulate another Rs 33 lakh due to the magic of compounding.
What is the 69 rule in compound interest? ›
The Rule of 69 is a simple calculation to estimate the time needed for an investment to double if you know the interest rate and if the interest is compound. For example, if a real estate investor can earn twenty percent on an investment, they divide 69 by the 20 percent return and add 0.35 to the result.
What are the rules of compounding? ›
The Rule of 72 is a heuristic used to estimate how long an investment or savings will double in value if there is compound interest (or compounding returns). The rule states that the number of years it will take to double is 72 divided by the interest rate.
What is Rule 72 in compound interest? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
