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
30 March 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.

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.

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.
  • 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 inflation.

Start small and grow big

You do not need a large amount of money to start investing in mutual funds. You can start with as little as Rs. 500 per month through a systematic investment plan (SIP). For example, if you invest Rs. 500 per month for 15 years in a mutual fund that gives 15% annual returns, you will have Rs. 3.85 lakh at the end of the period. This is more than 50 times your initial investment.

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.