As of August 2024, inflow into equity mutual fund schemes grew by 3% to ₹38,239.16 crore and the total amount collected via SIP investments in the same month was ₹23,547 as per the data by the Association of Mutual Funds in India (AMFI). Two key features of SIPs that make them extremely popular are – they help you benefit from rupee-cost averaging and the power of compounding. The 8:4:3 rule is a tool that helps investors make the most of the power of compounding.

What is the 8:4:3 rule in SIP investments?

The 8:4:3 rule suggests that your mutual fund SIP investment might experience the following growth pattern with consistent investments and a healthy rate of return:

  • Initial growth: In the first 8 years, you see a steady growth in your SIP investments.
  • Accelerated growth: The abovementioned “steady growth” accelerates in this second phase – between years 9 and 12 – due to the power of compounding.
  • Exponential Growth: Finally, between years 13 and 15 – the final three years – your investment might experience rapid growth.

This gradual acceleration of growth leading to an exponential growth of returns is the goal of the 8:4:3 strategy. So, how can you achieve similar growth?

Understanding the impact of the 8:4:3 rule with an example:

If an individual, named A, starts an SIP with a monthly investment of ₹10,000, an investment period of 15 years, and an expected average annual return of 12%, as per the 8:4:3 rule, here is how their investment will grow:

  • Initial growth: A’s returns might cross the ₹8 lakh figure by the end of the eighth year, with the estimated corpus being over ₹18 lakh.
  • Accelerated growth: In the second stage, the power of compounding comes into effect. A’s investment amount might potentially double within this timeframe due to the ‘snowball effect’ generated by the power of compounding. The net value of A’s corpus might grow to be more than ₹40 lakh by now.
  • Exponential growth: In the final two years, that is between years 13 and 15, the growth of A’s assets will continue. In the fifteenth year, the total value of their investment could potentially reach around ₹67 lakh.

How to maximise the 8:4:3 rule to grow high returns?

You can follow these points to consistently grow your returns using the 8:4:3 rule:

  • Be consistent with your SIP contributions: You must consistently invest in the mutual fund and gradually increase the value of your SIP contributions.
  • Research and compare funds using an SIP calculator before investing: You must consider features like the expense ratio, past performance, and the risks involved and use an SIP calculator to estimate your returns. 
  • Diversify your portfolio: Next, you must diversify your portfolio by spreading your investment across various asset classes.
  • Reassess your SIP investments: Finally, you must keep reassessing your SIP investments to check if they align with your investment objectives and if they don’t, you must make the necessary changes.

In conclusion

The 8:4:3 rule helps you maximise your SIP investment returns by leveraging the power of compounding. You can use this rule to consistently earn higher returns through your mutual fund investments.