The power of compounding is immense – far beyond the imagination of most and the reason that investment experts constantly advise investors to dig in their heels in the mutual fund industry for long years to reap the benefits fully. The 8:4:3 rule gives an idea of what the benefits can be under normal circumstances.
Mutual Fund: Start a SIP to realise potential
If a person begins a Systematic Investment Plan (SIP) in a scheme, its pattern of growth would be approximately captured by this formula. Consider a 12% return for the calculation.
Years 1-8
In years 1 to 8, the value of investment will grow steadily. But in the next four years – in other words, years 9 to 12 – the same appreciation in the first eight years will be achieved. Note that it took half the time to record it.
Years 9-12 and 12-15
If the investor stays invested and does not redeem units, he/she will achieve the same growth of the first eight years or the second block of 4 years but within three years – years 13-15. In other words, it means that an investor should stay put for at least 15 years to see this accelerating growth in the value of the mutual fund portfolio.
Moral of the story
The moral of the story is that investors should not feel disappointed if the pace of growth of the value of the portfolio is not up to his/her expectation. If one can continue investing with rigour and discipline, the investments are bound to give handsome returns.
The calculation
Let’s try to understand with concrete figures. Let a person put Rs 1,000 in SIP. The expected rate of return remains the same 12%. In the first 8 years, the invested amount is Rs 96,000, while the returns amount to Rs 65,527 taking the corpus to Rs 1,61,527.
Let’s look at the next four years. In the 12th year, the invested amount would rise to Rs 1,44,000. But the returns would swell to Rs 178,252. The total value of the portfolio would be Rs 3,22,252.
Let’s take years 13, 14 and 15. The nominal investment from the investor would reach Rs 180,000. But the gains would jump to Rs 3,24,576. The value of the portfolio would stand at Rs 5,20,576 at the end of the 15th year.
Mutual Fund SIP investment: The key attraction of the mutual fund industry lies in the power of compounding. This rule gives an investor an idea of its potential. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
