The
8-4-3 rule of compounding
is a guideline that suggests how much money you need to invest each month to achieve a specific corpus over a given period, assuming a certain rate of return. Here are some basic rules of
investing
to build a good corpus
Start investing early: The earlier you start investing, the more time your money has to grow through compounding.
Invest regularly: The key to
compounding
is regular, disciplined investments. Even if you start late, consistent investments can help you reach your goal.
Leverage the power of compounding: Compounding means that your initial investment earns returns, and those
returns
also earn returns, leading to exponential growth over time. The longer you stay invested, the more powerful the compounding effect becomes.
Choose the right investment vehicles: To achieve the assumed returns (typically 10-12% per annum), you need to invest in growth-oriented instruments like
equity
mutual funds, which have the potential to generate higher returns over the long term, albeit with higher risk.
Adjust for inflation: While the rule provides a simple guideline, it's essential to consider inflation and adjust your investment amounts accordingly. The target corpus of Rs 1 crore may need to be higher to account for the rising cost of living over time.
ET breaks it down to explore how you can build a corpus of Rs 1 crore using this rule.
1. Understanding Compounding:
Simple Interest: When you invest money, simple interest is calculated only on the principal amount (the initial investment).
Compound Interest: In contrast, compound interest is calculated on both the principal amount and the interest earned on it. This means you earn interest on previously accumulated interest.
2.The 8-4-3 rule explained:
- You can follow this rule to systematically grow your money:
- 8% of Your Income: Allocate 8% of your
income
towards investments.
- 4% Return: Aim for an annual return of 4% on your investments.
- Reinvest for 3 Decades: Continue reinvesting your returns for a period of 30 years.
3. Example Illustration:
- Let's say you invest a lump sum of Rs 21,250 every month in an instrument that earns **12% interest per annum** compounded yearly.
- Here's how your corpus grows:
- 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.
- After the next 3 years (total 15 years): You'll achieve the coveted Rs 1 crore milestone
- 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.
Equity SIPs and good return
Consider investing in equity systematic investment plans (SIPs). Historically, they have delivered good returns.
Remember, consistency, discipline, and the power of compounding can help you achieve your financial goals. Start early, stay invested, and let time work its magic!
FAQs
The rule of 8-4-3 for mutual funds or the 8-4-3 rule of compounding is that if you invest Rs 30,000 monthly into an SIP with a return of 12% per annum, then your portfolio will add Rs 50 lacs in the first 8 years, Rs 50 lacs in the next 4 years to become Rs 1 cr in total value and adds further Rs 50 lacs in the next 3 ...
How to get 1 cr in 15 years? ›
The famous 15*15*15 Rule states that an investor trying to accumulate Rs 1 crore should consider an SIP of Rs 15,000 per month at 15% for 15 years to get to Rs 1crore. While this approach holds mathematical validity, it may not be suitable for all investors and market conditions.
What is the 15 15 15 rule of SIP? ›
What is 15-15-15 Rule? The rule says to achieve the goal of earning Rs 1 crore, an investor should invest Rs 15,000 monthly through SIP for 15 years, considering a 15% annual return from an equity fund. Consistent adherence to this strategy can lead to significant wealth accumulation.
How to use the 8 4 3 rule of compounding? ›
What is the 8-4-3 investment rule?
- 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.
If you initially invest Rs 7,500 a month in SIP and increase the amount by 5% every year, you can save Rs 1 crore in 20.3 years (244 months). If you increase it by 10% every year, you can achieve your goal in little less than 18 years (215 months).
What is the value of 1 cr after 15 years in india? ›
If we assume an inflation rate of 5%, the worth of Rs 1 crore after 15 years is about Rs Rs 48 lakh. The value of 1 Cr in 30 years will decline and become Rs. 23 lakhs due to inflation. 1 lakh would be worth roughly INR 48,000 in 15 years, assuming a 5% inflation rate.
How to save $1000000 in 15 years? ›
$1 Million the Easy Way
Putting aside someone's $40,000 in take-home pay every year—and earning that 10% return as described above—will get you to millionaire status in about 15 years. Halve those savings and you're still only looking at 20 years. It will take more work for sure, but it's a lot faster than 51.
What if I invest $5,000 in SIP for 20 years? ›
If someone begins a SIP of 5000 per month for a span of 20 years, at 12% assumed annualized rate of return per annum, your total investment in 20 years is Rs. 12 lakh and the accumulated corpus at the end of tenure is close to Rs. 50 lakhs.
What happens if I invest 15000 a month in SIP for 15 years? ›
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 to quickly save RS 1 crore use this 8-4-3 rule of compounding? ›
The 8–4–3 rule of compounding can be your way to achieve the Rs 1crore corpus goal. Jiral Mehata, senior research analyst,FundsIndia said that in this strategy,if you invest Rs 10,000 every month, assuming annual returns of 12 %, it takes 8 years to reach the Rs 16 lakh maturity amount.
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.
How much to invest to get 1 crore in 10 years? ›
In order to make 1 crore in 10 years, here are the following amount one needs to invest. An individual can invest INR 38,050 to get 15% annual interest. Hence, in 10 years, the amount will be INR 1,0,09,124, and the investor will achieve the target of making 1 crore in 10 years.
How to build a corpus of 1 crore? ›
There are a range of options including mid-cap, large-cap, hybrid, debt and debt funds. If an investor puts at least Rs 12,656 every month in high-return small-cap funds for an extended period of 15 years, a corpus of Rs 1 crore can be achieved, assuming an average return of 18 per cent.
Can I retire with 1 crore in India? ›
Adhil Shetty, CEO of Bankbazaar.com, says, “Retiring with a corpus of over Rs 1 crore is achievable with early planning and disciplined investing. By leveraging the power of compounding, diversifying your portfolio, and periodically increasing your investments, you can build a substantial retirement fund.
How to make 1 crore by investing 5000 per month? ›
If you continue with your investments for a long time, you can easily become a crorepati. In 26 years, you can accumulate a Rs 1 crore corpus if you begin investing Rs 5,000 per month in mutual fund SIP. Here the interest rate, let's assume, remains constant at 12 per cent per annum.
How to grow 1 cr in 5 years? ›
The essential steps to make ₹1 crore in 5 years include setting your financial goals early on, planning your path, investing in Equity Mutual Funds, and doing consistent tax planning. The popular investment options in India include stocks, bonds, ETFs, mutual funds, and ULIPs.
How to earn $1,000,000 in 10 years? ›
Save as Much as You Possibly Can
“Say you're going to average 10% a year on your investment return — you're going to need to save about $5,000 each month to save $1 million.” Moore recommends putting this money into an employer-sponsored retirement savings account, if possible.
How to get 2 crore in 20 years? ›
An investment of Rs 20,000 a month will help you amass Rs 2 crore, which would last for roughly 27 years after retirement. Invest only after recalculating your projected expenses and accounting for inflation. You can invest in blue-chip and passive funds to build your retirement corpus.
How to get $1,000,000 in 20 years? ›
To save $1 million in 20 years, you would need to save approximately $1,900 per month, assuming an average annual investment return of 7%. This calculation considers the power of compound interest and is subject to variations based on actual returns and investment choices.
