15 15 15 rule in mutual funds
Investing in mutual funds requires careful planning and patience. If you wish to generate a large corpus out of it, you not only need money and strategy, but time is something you ought to consider. Investing for the long term can significantly improve your returns from mutual funds on investment, and following the 15 15 15 rule, you can build a 7-figure portfolio.
What is the 15 15 15 rule?
The rule follows a series of 3 15s to help investors get 7-figure returns. As per the rule, if you invest Rs 15000 per month for 15 years in a fund scheme that offers a 15% interest annually, you can gather Rs 1 crore at the end of tenure. To make this investment, you only need a total investment of Rs 27 lakhs, while you will earn Rs 73 lakhs. If you extend your investment for another 15 years, your corpus will grow to 10 crores. And so on.
The 15 15 15 rule basically aims to leverage the power of compounding, and turns the small periodical investments into a large corpus in the long run. For maximum utilization of compounding, you need to start investing in mutual funds early and stay invested in funds for a long time. That's the basic need for the compounding process to work.
What is the compounding effect of mutual funds?
Compounding holds the utmost importance in mutual funds. It's actually the core of the investment as it defines how much returns you will generate over time. In mutual funds, compounding is essentially a process wherein a small amount of invested money grows into a large sum over time. The more you are consistent, reinvesting, and staying invested in mutual funds, the more you can reap the benefits of compounding and thus earn better returns.
How does compounding work?
Suppose you have invested in mutual funds and opted for a SIP (Systematic investment plan). You start with a monthly SIP of Rs 5000 for ten years at an interest rate of 10% to create a significant corpus for buying a property. So the total invested amount will be Rs 6,00,000, which would earn returns of Rs 4,32,760. So at the end of the tenure, you will have a corpus of Rs 10,32,760. If you choose to reinvest in the same fund scheme for another 10 years, at the same interest rate, you will be able to generate Rs 38 lakhs approx. That's the power of compounding. If you continue to reinvest, your money grows exponentially over a period while you considerably minimize volatility risk.
How does the power of compounding work in the 15 15 15 rule?
The 15 15 15 rule is concentrated on investing in values of 15s. As per the 15 15 15 rule, mutual funds investors invest in Rs 15000 SIP per month at a rate of interest of 15% for 15 years. And at the end of tenure, generate approximately Rs 1 crore.
The concept of compounding here works when you continue to invest for another 15 years with the same investment rate and SIP. Doing so will help you with an exponential gain of approximately Rs. 10 crores. The idea is to stay invested for an additional 15 years if you won't earn substantially higher returns. But since it's a very long-term investment, start investing as early as possible.
Also, remember that although the interest rate is 15%, your investment can experience a 20% return in one year and -6 % in the other because of market fluctuations. The 15% is the assumed interest rate over the total investment period.
Benefits of 15 15 15 rule in mutual fund investment
With the 15 15 15 rule, mutual funds investors can reap many benefits, such as
- Compounding effect: The concept of SIP and the time in 15 15 15 rule is to take advantage of compounding. In the longer run, the compounding gains effect becomes more evident, ensuring you gain better returns than a lump-sum investment.
- It makes you a disciplined investor: For the 15 15 15 rule, mutual funds demand consistency and discipline in your investment to work. The rule 15 15 15 brings this aspect through SIP so that you can easily manage your finances. With automated payment options in SIP, you can ensure that your monthly SIP is paid on time and save yourself from the hassles of manual payments every month.
- Offers a flexible investment approach: With SIP, you get the flexibility to manage your investments. You can start, stop or skip as per your need. Also, you can redeem your investment as per your wish in case your fund scheme doesn't have a lock-in period.
- Rupee cost averaging: Since you're investing in mutual funds through SIP, you can utilize the benefits of rupee cost averaging. Investing through SIP means inverting a predetermined amount per month (in this case, Rs 15,000) which helps in averaging. So when the markets are high, fewer fund units can be bought, but when the market is low, there is an opportunity to buy a large number of units. Doing this will keep your portfolio in balance and help you achieve your goals in the long term.
The most important points the 15 15 15 rule highlights are to stay invested for a long time and allow your investments a sufficient amount of time to perform in the market.
Investing in mutual funds for the long term, in general, has several benefits. But, when you consider the effect of compounding on it, it becomes even more worthwhile. Also, the earlier you start investing, the more you can utilize the power of compounding, and the more corpus you will be able to accumulate over time. For this, long-term mutual funds are an ideal choice. These funds offer a lot of flexibility in terms of redeeming fund units, switching between funds, transparency, and getting exposure to the equity market.
Along with the pros of the 15x15x15 rule, it's important to note that there isn't one size fits all approach to investments. All investment decisions of an investor depend on his financial situation, goals, and risk-taking ability, so no two investments can be the same. Besides, equity investments are prone to market fluctuations and risk. If 15*15*15* doesn't fit into your investment strategy, you can use it as a guideline to evaluate your portfolio.
Get your queries answered related to the 15 15 15 rule with this FAQ section.
As per rule 15 15 15, how long do I need to invest in mutual funds?
As the 15 15 15 rule defines, investors are required to invest for 15 years. Depending on your financial goals, you can invest for another 15 years, and so on.
When should I start investing in mutual funds?
There is a specific age or time to invest in mutual funds. However, if you have a long-term goal and want to get maximum compounding benefits, start as early as possible.
Is rule 15 15 15 obligatory for every investor?
No. But investors can use this rule as a benchmark to plan their mutual fund investment.