8-4-3 Investment Rule

In one of our previous blog, we covered 15-15-15 rule related to mutual fund investing. Today, we will share another interesting rule to help you understand how mutual fund investing can be the best option when it comes to investing. The rule we will cover today is known as the 8-4-3 investment rule.

What is the 8-4-3 investment rule?

The 8-4-3 rule is a concept used to illustrate the power of compound interest in growing your investments over time. If we look at it carefully, it is not an investment strategy, but rather a simplified way to understand the potential acceleration of growth. Let us look at the rule in detail.

It suggests that with consistent investment and a healthy rate of return, your investment might experience the following growth pattern:

• Initial Growth (Years 1-8): You see steady growth in your investment amount for the first eight years.
• Accelerated Growth (Years 9-12): In the next four years (years 9-12), your investment might achieve similar growth to what it achieved in the first eight years.
• Exponential Growth (Years 13-15): In the final three years (years 13-15), your investment might again experience similar growth to the previous four years

In the next section, we will look at how it applies to mutual fund investing.

Example of the effect of the 8-4-3 investment rule

Imagine you start a Systematic Investment Plan (SIP) in a diversified equity mutual fund scheme on a monthly basis. Let us make the following assumption:

• Monthly Investment: Rs 10,000
• Investment Period: 15 years (the 8-4-3 rule can apply to shorter horizons as well)
• Assumed Average Annual Return: 12% 

Now, as per the 8-4-3 Rule:

• Year 1-8: With a compounded return of 12% on average, your investment might reach approximately Rs 8.36 lakh by the end of year 8. It considers both your monthly contributions and the returns generated.
• Years 9-12: The power of compounding kicks in. Your investment amount might potentially double within this timeframe due to the snowball effect. By the end of year 12, the total value might reach around Rs 16.72 lakh.
• Years 13-15: The growth accelerates further. In year 15, the total value of your investment could potentially reach around Rs 25.08 lakh.

Strategies to maximize returns on Mutual Fund

When it comes to mutual fund investment, there are two mandatory things:

• Continue your SIPs
• Stay Invested for as long as possible

Once you take care of the above mandatory points, you can move to the next step - maximize returns. Here are a few things you can do:

• Diversification: Don't put all your eggs in one basket. Diversify across asset classes (equity, debt, gold) and market capitalizations (large-cap, mid-cap, small-cap) to mitigate risk.
• Research & Analyze: Research different mutual fund options. Look at factors like expense ratio (fund management fees), past performance (remember, past performance doesn't guarantee future results), and the fund manager's track record.
• Asset Allocation: Strategically allocate your investments across different asset classes based on your risk tolerance and goals. Rebalance your portfolio periodically to maintain the desired asset allocation.
• Cost Control: The expense ratio is an ongoing cost. Consider low-cost index funds that passively track a market index and typically have lower expense ratios. For active funds, look for funds with the best returns and the lowest expense ratio.
• Review Regularly: Periodically review your portfolio performance and adjust your strategy as needed based on your goals and market conditions.

Before you go

We hope you learned something new today and will adopt this rule in your investment journey. The 8-4-3 investment rule provides you with a clear path for your mutual fund investments. It tells you that if you stay invested for long, the magic of compounding comes in and you make more money in less time as your investment age.