The 8-4-3 Rule And A Rs 5,000 SIP: The Easiest Way To Understand How Compounding Works

The simplest way for new investors to understand compounding and how it works is by understanding the 8-4-3 rule. This rule shows how the compounding process does not happen evenly over time. It begins slowly during the initial years but catches pace over the later years of your investing.

Take, for instance, a Rs 5,000 monthly SIP (systematic investment plan).

At an assumed 12 per cent annual return, that Rs 5,000 a month runs quietly for years before it starts looking impressive.  In the first 8 years, your total investment would be Rs 4.8 lakh. The value grows to roughly Rs 8 lakh. It’s decent, but not life-changing. This is the phase where many novice investors feel nothing much is happening. You’re putting money in, you see some growth, but it doesn’t feel like “wealth.”

Then comes the next phase.

Between years 8 and 12, something shifts. You keep investing the same Rs 5,000. By year 12, the corpus reaches almost Rs 16 lakh. That means in just four years, the wealth added is nearly equal to what the first eight years built. Same SIP amount, same assumed return, but more time behind it.

And then the last stretch of the 8-4-3 rule, that is, the three years after that.

By year 15, the corpus moves to roughly Rs 25 lakh. In just three years, nearly Rs 9 lakh has been added. That’s more than what was built in the entire first eight years. Nothing changed except time and the size of the base.

That’s what the 8-4-3 rule tries to capture. The first eight years in investing feel slow. The next four feel faster. The next three feel like the snowball finally rolling downhill. This is the phase, according to the 8-4-3 rule, where compounding works the best. No doubt experts ask investors to invest via SIPs for a longer time frame.

What makes this interesting is not the short 15-year example. It’s what happens when you stretch it out.

If someone starts a Rs 5,000 SIP early in their working life and keeps it running for 35 years at the same 12 per cent assumption, the total investment over that period would be Rs 21 lakh. The corpus at the end? Roughly Rs 3.2 crore.

The gap between Rs 21 lakh invested and Rs 3.2 crore accumulated is where compounding does its heavy lifting. Most of that growth does not come in the first decade. It comes much later, when the base has grown large enough.

Adding one more layer: The Step-Up SIP

Income usually does not stay flat for 35 years. If the SIP is increased every year,  what’s called a step-up SIP, the numbers change dramatically. A 5 per cent annual increase in the SIP amount can push the final corpus to roughly Rs 4.5 crore over 35 years. A 10 per cent annual increase can take it closer to Rs 8 crore.

The interesting part is that the first few years still won’t look extraordinary. Even with a step-up, the visible jump happens much later. The early phase still feels slow.

So, while eight years can feel like a very long time when returns seem modest. But what the numbers quietly show is that the later years are shorter in effort but heavier in outcome.

Take these rules with a pinch of salt, as the 8-4-3 rule is not a formula carved in stone. Markets do not move in straight lines. Returns are not guaranteed. But the pattern, which is – slow start, faster middle, explosive later years,  repeats often enough to matter.