When it comes to accumulating wealth in the long run, mutual funds are one of the most popular options for investors. These funds allow you to make deposits at regular intervals to create a lump sum at the end of your tenure. Systematic Investment Plans (SIPs) allow investors to choose a minimum monthly amount. This can lead them to accumulate big sums, even as high as Rs 1 crore.
While the amount may seem like a pipe dream, saving Rs 1 crore via SIP is possible. It all depends on compound interest, specifically the 8-4-3 rule of compounding.
The 8-4-3 Rule Of Compounding Explained
The idea is based on the principle of compound interest, wherein the interest is earned on both the principal and the accumulated interest. As per the rule, the first eight years are when the money increases at a steady pace. After that, its rate of increase over the next four years will be higher due to compound interest. In the final three years, the investment will snowball.
For example, suppose you invest Rs 21,250 per month. At an interest rate of 12 per cent, in eight years, the investment will increase to Rs 34.3 lakh. Due to the power of compound interest, this Rs 34.3 lakh will become Rs 68.5 lakh in just four years. In the next three years, the total corpus will be Rs 1 crore. So in 15 years, you will be able to accumulate Rs 1 crore for your financial needs, following this simple principle.
Things To Keep In Mind
The 8-4-3 rule only works if the investment is made for a longer term. You need to keep investing for 15 years to achieve your financial goals. In case of interest rates, market volatility, and other events, your rate of return can fluctuate. Do not panic in case of a short-term slump in your SIP and discontinue your investment.
Do consider the potential impact of inflation on your long-term financial goals. While the amount you decided today may seem to be adequate, it can be insufficient for your needs later on due to inflation.
Taxation is another factor you will have to keep in mind. Once you end your plan, you will have to pay a tax on the total amount. Ensure that paying taxes does not leave you short of your goal by investing accordingly.
Mutual funds are far riskier options compared to fixed deposits or other traditional investments. On the other hand, the rate of return is higher as well, prompting many to consider this option. With the 8-4-3 rule of compounding, you can ensure you have a corpus of wealth later on in life.
. Read more on Personal Finance by NDTV Profit.The rule is based on compound interest and can be beneficial in terms of long-term investments. Read MorePersonal Finance
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