Power of Compounding: Understanding rules of 8:4:3, 114, 72 & how they work on your mutual fund investments

When it comes to mutual fund investments, two key principles can significantly impact your financial growth: the 8:4:3 rule and the Rule of 72. Let’s delve into these concepts to understand how they can help you optimise your investments and achieve long-term wealth.

What is the 8:4:3 Rule?

The 8:4:3 rule is a time-tested strategy designed to help investors visualise the growth of their mutual fund investments. This rule is based on the principle of compounding interest and suggests that if you invest in a mutual fund with a 12 per cent annual return, your investment will double approximately every 8 years. After the first doubling, it will double again in the next 4 years, and then a final time in the subsequent 3 years.

Applying the 8:4:3 rule means that your mutual fund investment will quadruple over 15 years and increase eightfold in 21 years. This approach highlights the potential of compounding over time, offering a clear path to substantial growth.

The Power of Compounding

Compounding interest is a critical factor in growing your investments. When you earn interest on both your initial principal and the interest that accumulates, your money grows exponentially. For example, if you deposit Rs 100 at an annual interest rate of 10 per cent, you’ll have Rs 110 after one year. The following year, you earn 10 per cent interest on Rs 110, bringing your total to Rs 121, and this process continues annually, resulting in surprising growth over time.

The Rule of 72: How Will Your Money Grow?

The Rule of 72 is a simple tool to estimate how long it will take for your investment to double. By dividing 72 by the annual interest rate, you can determine the number of years required for your money to double. For instance, if you invest Rs 100 at a 10 per cent annual interest rate, the calculation is 72/10 = 7.2 years. This means your investment will double in approximately 7.2 years.

For a larger investment, such as Rs 1,00,000, it will become Rs 2,00,000 in around 7 years if you maintain continuous investment and potentially increase your contributions.

Becoming a Millionaire: How Early Investment Pays Off

To accumulate significant wealth for retirement, start investing as early as possible. For example, investing ₹5,000 monthly from the age of 25 with a 10 per cent annual return could result in a fund of over Rs 1 crore by the age of 60. This highlights the importance of early and consistent investing.

When Will Your Money Triple or Quadruple?

• Rule of 114: To estimate when your money will triple, divide 114 by the annual interest rate. For an 8 per cent return, 114/8 = 14.25 years. Thus, your money will triple in about 14.25 years.
• Rule of 144: To determine when your money will quadruple, divide 144 by the annual interest rate. With an 8 per cent return, 144/8 = 18 years. Therefore, your money will quadruple in around 18 years.

Recent Investment Regulations

New regulations in mutual fund investments include mandatory nominations, linking PAN and Aadhaar numbers, requiring one-time passwords, and revalidating KYC information. These updates are aimed at improving the efficiency and security of the investment process.

Benefits of the 8:4:3 Rule

• Disciplined Investing: The 8:4:3 rule helps investors maintain investment stability, avoiding rash decisions during market fluctuations.
• Inflation Alignment: It ensures that investments remain resilient against a 4 per cent annual inflation rate, preserving their value over time.
• Dynamic Portfolio Management: Encourages regular portfolio reviews to adapt to changing market conditions, minimising risks and maximising opportunities.

The 8:4:3 rule and Rule of 72 offer valuable insights into mutual fund investments and the benefits of compounding. By adhering to a disciplined investment approach and leveraging these rules, you can achieve significant growth and financial success. Opening a demat account on Angel One will provide you with access to various stocks and mutual funds, along with expert advice to guide your investment decisions.

Disclaimer: This article is for informational purposes only and does not constitute financial advice or a recommendation to invest in any particular stock. The stock market involves risks, and it is essential to conduct thorough research and consult a professional advisor before making any investment decisions.