15-15-15 Rule in Mutual Fund

The 15-15-15 investing principle suggests dedicating 15% of your income over 15 years to a mutual fund offering 15% annual returns, aiming to realise long-term financial objectives.
15-15-15 Rule in Mutual Fund
3 mins read
18-June-2024

The 15-15-15 rule of investing is a simple and effective way to achieve your long-term financial goals. It is based on the principle of compounding, which means earning interest on your interest.

The rule suggests that you should invest 15% of your income for 15 years in a mutual fund that gives 15% annual returns. If you follow this rule, you can turn a small amount of money into a large sum over time.

In this article, we will explore the meaning of 15-15-15 rule, its benefits, and much more.

Understanding the 15-15-15 principle in mutual funds

The 15-15-15 principle outlines a strategic approach to mutual fund investment with three key components:

  1. Monthly investment: Begin by investing Rs. 15,000 every month.

  2. Investment duration: Maintain this investment for a span of 15 years.

  3. Expected returns: Aim for an average return of 15% on your investment annually.

If you follow this plan and achieve a consistent 15% return over the 15-year period, your portfolio could potentially exceed a crore at the end of the tenure.

To visualise the outcome, consider using the SIP calculator and check the results.

Key takeaways

  • The 15-15-15 rule suggests investing 15% of your income for 15 years in a mutual fund with 15% annual returns.
  • Compounding is the process of reinvesting earnings to generate more returns.
  • The longer you stay invested, the greater the compounding effect. =
  • By following this rule, you can achieve long-term financial goals such as accumulating a substantial corpus for future needs.
  • You can start investing in mutual funds with as little as Rs. 500 per month through a systematic investment plan (SIP).

What is compounding?

Compounding is the process of reinvesting your earnings to generate more returns.

For example, if you invest Rs. 1,000 in a mutual fund that gives 10% annual returns, you will have Rs. 1,100 after one year.

If you reinvest this amount, you will have Rs. 1,210 after two years.

If you keep doing this for 10 years, you will have Rs. 2,593.74.

This is how compounding works. It multiplies your money by increasing the base amount on which the returns are calculated.

What is the power of compounding?

The power of compounding is the ability of your money to grow exponentially over time. The longer you stay invested, the higher your returns will be.

Here are some factors that demonstrate the power of compounding:

  • Time: The more time you give to your investments, the more they will compound. For example, if you invest Rs. 1,000 for 10 years at 10% annual returns, you will have Rs. 2,593.74. But if you invest the same amount for 20 years, you will have Rs. 6,727.50. That is more than double the amount in half the time.
  • Rate: The higher the rate of return, the faster your money will compound. For example, if you invest Rs. 1,000 for 10 years at 10% annual returns, you will have Rs. 2,593.74. But if you invest the same amount for 10 years at 15% annual returns, you will have Rs. 4,045.56. That is more than 50% higher than the previous amount.
  • Amount: The more money you invest, the more you will benefit from compounding. For example, if you invest Rs. 1,000 for 10 years at 10% annual returns, you will have Rs. 2,593.74. But if you invest Rs. 2,000 for 10 years at the same rate, you will have Rs. 5,187.48. That is twice the amount with the same time and rate.

Examples of compounding

Compounding is a fundamental concept in investing that plays a crucial role in wealth accumulation over time, especially in mutual funds within the Indian financial market. Here are detailed examples illustrating how compounding works in practical terms:

1. Systematic Investment Plan (SIP) illustration

A SIP is a popular method of investing in mutual funds where an investor contributes a fixed amount regularly (e.g., monthly). Let's consider an example:

  • Initial investment: Suppose an investor starts a SIP with Rs. 5,000 per month.

  • Annual returns: Assume the mutual fund generates an average annual return of 12%.

  • Investment period: The investor plans to continue this SIP for 20 years.

Now, let us calculate the potential value of this investment using compounding:

  • After 5 years: The investment grows to approximately Rs. 4.12 lakhs.

  • After 10 years: It grows further to around Rs. 11.61 lakhs.

  • After 20 years: The investment could potentially grow to over Rs. 50 lakhs.

This exponential growth is primarily due to the compounding effect, where each year's returns are reinvested, allowing the investment base to grow and generate higher returns over time.

2. Impact of higher returns

Compounding becomes more powerful with higher rates of return. Let's compare the previous example with a slightly higher annual return of 15%:

  • After 5 years: The investment grows to approximately Rs. 4.48 lakhs.

  • After 10 years: It grows further to around Rs. 13.93 lakhs.

  • After 20 years: The investment could potentially grow to over Rs. 76 lakhs.

Here, the 3% increase in annual returns significantly boosts the final corpus due to compounding. The longer the investment horizon and the higher the rate of return, the more pronounced the compounding effect becomes.

3. Impact of regular contributions

Regular investments through SIPs leverage the power of compounding effectively. For instance:

  • If an investor starts with Rs. 3,000 per month and increases it by 10% annually, and the mutual fund returns 12% annually:

    • After 10 years: The investment could grow to approximately Rs. 10.12 lakhs.

    • After 20 years: It could potentially grow to over Rs. 59.66 lakhs.

This example demonstrates how consistent and increasing contributions combined with compounding returns can lead to substantial wealth creation over the long term.

4. Real-life market performance

Historical data from mutual funds in India also showcases the power of compounding. Many equity mutual funds have delivered annualised returns of 12-15% or more over extended periods, despite market fluctuations. Investors who stay invested through market cycles benefit from the compounding effect, which smooths out short-term volatility and enhances long-term returns.

Benefits of 15-15-15 rule in mutual fund investments

Here are some benefits of following the 15-15-15 rule in mutual fund investments:

  • Achieve your long-term goals: By investing 15% of your income for 15 years in a mutual fund that gives 15% annual returns, you can accumulate a large corpus over time. For example, if you earn Rs. 50,000 per month and invest 15% of it, i.e., Rs. 7,500, for 15 years in a mutual fund that gives 15% annual returns, you will have Rs. 57.65 lakh at the end of the period. This can help you meet your financial needs in the future. Investors can accurately estimate their potential earnings using the SIP calculator. These tools consider the invested amount, investment duration, and anticipated returns, providing a clear projection of the growth of your mutual fund SIP over time.

  • Beat inflation: Inflation reduces the purchasing power of your money and erodes your savings. By investing in a mutual fund that gives 15% annual returns, you can outpace inflation and preserve the value of your money. For example, if the inflation rate is 6%, your Rs. 1,000 today will be worth only Rs. 174.11 after 20 years. But if you invest the same amount in a mutual fund that gives 15% annual returns, you will have Rs. 16,366.10 after 20 years. This means you will have more than 90 times the amount after adjusting for inflationent.

Conclusion

In conclusion, the 15-15-15 rule of investing in mutual funds presents a straightforward yet powerful strategy for achieving long-term financial objectives. Grounded in the principle of compounding, where earnings generate further earnings over time, this rule advocates investing 15% of income for 15 years in a mutual fund yielding 15% annual returns. The cumulative effect of reinvesting returns steadily amplifies the initial investment, transforming modest sums into substantial wealth.

The ability to accurately predict future earnings using tools like SIP calculators underscores the rule's effectiveness in financial planning. This approach not only helps individuals achieve their financial goals but also shields against inflation, ensuring that savings retain their purchasing power over time. Ultimately, embracing the 15-15-15 rule empowers investors to secure their financial futures through consistent and strategic mutual fund investments in the dynamic landscape of the Indian financial market.

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Frequently asked questions

How to invest 15-15-15?

There are different ways to interpret this question, but one possible answer is:

Invest Rs. 15,000 per month for 15 years in a mutual fund that gives 15% annual returns. This is called the 15-15-15 rule of compounding, which can help you accumulate Rs. 1 crore. If you continue for another 15 years, you can get Rs. 10.38 crore.

How does compounding benefit mutual fund investments?

Compounding is earning interest on interest or having further growth on growth. It allows your balance to grow faster than simple interest, which only considers the principal amount. The more money you invest and the longer it stays, the more compound interest you earn. Reinvesting dividends and distributions also increases your compound interest.

What is 15-15-15 investment policy?

The 15-15-15 investment policy suggests investing 15% of your income for 15 years in mutual funds yielding 15% annual returns. This strategy leverages compounding to grow savings significantly over time, aiming to achieve long-term financial goals.

How to calculate 15-15-15 rule?

To calculate the 15-15-15 rule, multiply 15% of your monthly income by 12 to get the annual investment amount. Invest this amount monthly for 15 years in a mutual fund targeting 15% annual returns. Use an SIP calculator to project potential earnings based on these inputs.

Can we get a 15% return on a mutual fund?

Achieving a 15% return on a mutual fund depends on market conditions and fund performance. Historically, some equity mutual funds in India have delivered annualised returns of 12-15% over the long term, but returns can vary based on economic factors and market fluctuations.

What happens if I invest Rs. 10,000 a month in SIP for 15 years?

If you invest Rs. 10,000 per month in an SIP for 15 years, assuming an average annual return of 12%, your investment could potentially grow to approximately Rs. 37 lakhs. Higher returns or longer investment periods can further increase the final corpus due to the compounding effect.

What happens if I invest Rs. 10,000 a month in SIP for 15 years?

If you invest Rs. 10,000 per month in an SIP for 15 years, assuming an average annual return of 12%, your investment could potentially grow to approximately Rs. 37 lakhs. Higher returns or longer investment periods can further increase the final corpus due to the compounding effect.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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