Investing in mutual funds is one of the most effective ways to build wealth, though other investment alternatives are available. However, complicated investment products make it difficult for investors to choose the right investment strategy.
One of the most popular and proven methods for wealth creation is the 15x15x15 rule in mutual funds. This simple yet powerful strategy leverages the power of compounding to help investors build a corpus of Rs. 1 crore with a systematic investment plan (SIP).
In this blog, we will explain the 15x15x15 Rule and the role of compounding, and discuss how to maximize your returns using this approach.
The role played by the power of compounding
“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” – Albert Einstein.
Compound interest makes your money grow faster because it is calculated on the accumulated interest and your original investment amount. It creates a snowball effect as the original investments and the income earned grow together.
When you invest in mutual funds, your returns are typically reinvested. This means that each period’s gains become part of your principal for future growth. This has a cumulative effect where your wealth grows faster as time passes.
Let’s understand the impact of starting your investment early with an example.
Ram and Shyam are of the same age. When Ram was 25, he invested Rs. 50,000 at 8% per annum, compounded annually. By the time Ram turns 50, his invested money will grow to Rs. 3,42,424. He will earn a whopping Rs. 2,92,424 interest on his initial investment of just Rs. 50,000.
On the other hand, Shyam did not start investing until he turned 35. At 35, he invested Rs. 50,000 at 8% per annum, compounded annually. When he turns 50, he will have accumulated Rs. 1,58,608. Of the maturity amount, Rs. 1,08,608 would be the interest.
Compounding is crucial in the context of the 15x15x15 rule because it amplifies your returns over time, making it possible to turn modest monthly investments into a substantial corpus.
More about the 15x15x15 rule for mutual fund investments
The 15x15x15 rule is a straightforward investment strategy that can help investors accumulate a significant corpus with disciplined investing.
This is how the 15x15x15 rule works:
- Investment Amount: Invest ₹15,000 every month.
- Investment Duration: Maintain this investment for 15 years
- Expected Return: Aim for an annual return of 15%.
By following this strategy, you can accumulate around ₹1 crore at the end of 15 years. Here is a breakdown of the investments made by employing the 15x15x15 rule:
- Total Investment: Over 15 years, you will have invested ₹27 lakh (₹15,000 x 12 months x 15 years).
- Estimated Returns: With a compounded annual growth rate (CAGR) of 15%, your total corpus could grow to about ₹1 crore (₹1,00,26,601 as per calculations), thanks to the power of compounding.
Interestingly, the rule focuses on SIPs and encourages individuals to consistently commit to their financial goals without letting fear or greed interrupt the process.
How to benefit from the magic of compounding
Compounding will help you become a crorepati by multiplying your investments over time. Here is how you can maximize the benefits of compounding by applying the 15x15x15 rule:
- Start Early: The sooner you begin investing, the more time your money has to grow. So, don’t wait to start big; start early and increase your investments as you have more disposable income. Starting at a younger age allows compounding to work its magic over an extended period.
- Stay Consistent: Regular investments through SIPs enforce discipline and let you take advantage of market fluctuations by buying more units when prices are low. Also, do not panic sell when markets turn volatile and stay invested through choppy markets.
- Reinvest Returns: Reinvest dividends or capital gains rather than withdrawing. Reinvestment accelerates the compounding process. This is why you should choose growth schemes, as they reinvest the dividends, helping you benefit from compounding.
- Monitor your Investments: Regularly review your portfolio to ensure it aligns with your financial goals and risk tolerance. Adjustments may be necessary based on market conditions or personal circumstances.
- Diversify your Portfolio: While focusing on mutual funds under the 15x15x15 rule, consider diversifying across different types of funds (equity, debt, hybrid) to manage risk effectively and benefit from compounding.
Implementing these strategies within the framework of the 15x15x15 rule can significantly enhance your potential returns and help you achieve your financial goals.
Conclusion
The 15x15x15 rule is not just a formula. It represents a disciplined approach to investing that leverages the power of compounding. By committing to invest ₹15,000 monthly for 15 years in mutual funds with an expected return of 15%, investors can build a substantial corpus that can lead them to financial independence.
Understanding and applying this rule requires patience and consistency, but offers significant rewards in terms of wealth accumulation. As you embark on this investment journey, remember that starting early and staying committed are key factors in maximizing your returns through compounding. Embrace the magic of compounding today and watch your financial dreams become reality!
