8 4 3 Rule In Mutual Fund Investing: The 8 4 3 formula in mutual fund investing is very famous. But do you know what it is all about and how it works? 8 4 3 rule of compounding tells how fast the return on an investment grows. Let's understand the 8 4 3 rule of compounding example:
8 4 3 Rule Explained | 8 4 3 Rule In Mutual Fund Investing
The 8 4 3 rule can help an investor to enjoy the benefit of compounding to grow his/her money faster. As per the 8 4 3 rule, an investor should stay invested for a period of 8 years. In these 8 years, you earn modest returns, and this is the period which tests your patience.
As per the 8 4 3 formula of mutual fund investment, the next 4 years after the first 8 years can actually double your money. Then comes the next 3 years. These 3 years actually allow you to enjoy the benefit of compounding.
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And if you remain invested even for more years, you can actually see your money increasing by 100 per cent every year, starting the 20th year from the start of the investment journey.
8 4 3 Rule Of Compounding Calculator | 8 4 3 Rule In Mutual Fund Investing
Suppose you do an SIP in a mutual fund: Rs 25,000 per month.
Let's assume you get a 12 per cent return every year.
After 8 years, you will have Rs 39.25 lakh in your portfolio.
In the next 4 years, the amount will grow to Rs 77.02 lakh.
In the next 3 years, your amount will become Rs 1.08 lakh.
8 4 3 Rule In Mutual Fund Investing 20 Years
Additionally, if you remain invested, you can actually add around Rs 1 crore every year, starting in the 20th year of the investment period.
However, this 8 4 3 rule of compounding does not apply to stocks because stocks are extremely volatile. However, in a mutual fund, the NAV is adjusted depending on the market volatility, and this allows an investor to buy more units during a volatile period. The NAVs are less volatile when compared with stocks.
8 4 3 Rule In Mutual Fund Investing: Historical Return
8 4 3 rule of mutual fund investing is a successful formula. It has worked almost in every scenario. Historically, it has been observed that people who have stayed invested in a mutual fund for a minimum of 8 years, have never booked loss.
