What is the 15×15×15 Rule in Mutual Funds?
The 15×15×15 rule in mutual funds is a concept indicating the impact of discipline and the power of compounding. It is a popular formula for wealth building. This rule explains that if an investor invests in a SIP of ₹15,000 for 15 years, assuming an annualised return of 15%, then the investor may build a corpus of around ₹1 crore by the end of the period.
Although it is just an estimate, it provides guidance for the beginner investors. Many new investors find it difficult to estimate how much money to invest to reach their specified financial goal, that is when this 15×15×15 rule guides their investment strategies.
How Does the 15×15×15 Rule Work? (Calculation and Example)
Let us take an example to understand the calculation of the 15×15×15 rule in mutual funds.
The main elements of this rule are
Amount of monthly SIP payments: ₹15,000
The investment period: 15 years
The assumed annualised return: 15% per annum
The investments made in 1 year: ₹15,000 × 12 months = ₹1,80,000
The total investment made throughout the tenure: ₹1,80,000 × 15 years = ₹27,00,000
Now, to calculate the estimated final value of the investment after compounding over the period, this formula is used.
M = P × ❲{[ 1 + i]^n – 1}/ i × (1 + i)
Where,
M = the amount received on maturity
P = the amount invested in regular intervals
n = the number of instalments made
i = the expected return (monthly)
Therefore, the amount to be received after 15 years of consistent SIP payments without failure will be ₹1,01,52,946, i.e., approximately ₹1 crore.
However, the return is not guaranteed and might change due to changing factors.
How does the 15×15×15 Rule Work? Step-by-step breakdown
The 15×15×15 rule in mutual funds can be broken into a few steps. They are mentioned below.
Step 1: The investment: Investors can start a Systematic Investment Plan (SIP) with a monthly payment of ₹15,000. SIP will allow them to be regular and stay consistent with their investment payments without pause.
Step 2: The tenure: Continue the SIP for 15 years without pausing during market declines. This facilitates the investment enough time to recover from short-term fluctuations and gain from the long-term potential.
Step 3: The return: Assume that the return in the investment is approximately 15% throughout the entire investment period. However, the return may change based on the changing market conditions.
Step 4: The power of compounding: Compounding is the most important factor of this rule. They will earn returns on the principal amount and the accumulated gains, which are reinvested to accelerate the growth rate.
Investment Strategy using the 15×15×15 Rule
The key strategies required to benefit from the 15×15×15 rule are mentioned below.
- Suitable mutual funds: Since the 15×15×15 rule assumes an average return of 15% per year, investors can consider equity-based mutual funds. Investing in diversified equity funds will provide the potential for long-term growth. However, the investment decision should align with the investor’s financial goals.
- Long-time horizon: The rule promotes investments to stay for a longer period of at least 15 years. This helps in recovering from the impact of short-term market declines taking place during the investment period and provides enough time for compounding to work to its full potential.
- Power of discipline: Consistency is the key component for a compounding process. Investors should consistently pay their SIP payments irrespective of the market conditions. Paying SIPs consistently will increase discipline and also benefit the investors by turning accumulated investments into significant returns.
- Patience during volatility: Being patient when the market is highly volatile is essential for creating wealth in the long run. In a bear market, investors need to stay consistent with their payments. They may even take advantage of the low market prices on investments.
Benefits of following the 15×15×15 Rule
The benefits of using the 15×15×15 rule in mutual fund investing are mentioned below.
- Supports the power of compounding: The key component of the 15×15×15 rule is the power of compounding. The returns earned by the investment are reinvested and facilitate generating additional earnings. Over the time period, the accumulated gains will substantially increase the final value of the investment and create a significant amount of wealth through long-term investing.
- Rupee cost averaging: Since the investments are made by Systematic Investment Plans (SIPs), this helps investors take advantage of the rupee cost averaging strategy. The strategy promotes buying more units when prices/NAVs are lower and fewer units when they are higher. This reduces the impact of market movements and eliminates the need to predict the highs and lows of the market.
- Promotes disciplined investing: This rule helps investors maintain disciplined and consistent investing for a long period. The fixed amount of money invested through SIP helps to reduce impulsive decisions during market movements. And consistency encourages the accumulation of more investment to promote wealth creation in the long run.
- Achievable goal setting: The 15×15×15 rule encourages investors to practice consistent fixed investment over random, impulsive spending. The estimated illustration gives them the idea of how regular, small fixed investments can grow into a substantial final value in the long run. This motivates the investors to start investing because it provides an achievable illustration of their financial goal.
Common Mistakes Investors Make (And How to Avoid Them)
| Common mistakes | How to avoid |
| Expecting 15% guaranteed returns | It is important to understand that the 15×15×15 rule is an assumption. In reality, the rate may change based on the market movements. |
| Pausing SIP during market corrections | Be consistent with SIP even during a bear market to benefit from a potential long term growth |
| Choosing investments only based on past performances | Identify the fund objectives, risk profile, and asset composition before making an investment |
| Being impatient with short-term performances | Understand that the 15×15×15 rule is an assumption for creating wealth in the long run. Avoid reacting to short-term performances of the investment. |
Final Thoughts
The 15×15×15 rule in mutual funds is a simple concept of wealth creation that shows the importance of consistent investing and the power of compounding. According to this rule, if an investor invests an amount of ₹15,000 every month through a SIP for a period of 15 years at a compounding interest rate of 15% per annum, they can earn an estimated return of around ₹1 crore.
However, in reality, the outcome may vary because of the market fluctuations.
This rule explains the importance of consistency and discipline, regular SIP investments, and being patient throughout the tenure to achieve substantial growth potential over a long period of time. Overall, the 15×15×15 rule is an assumption that helps investors estimate the potential growth of an investment over a long period of time to contribute to wealth creation through the advantage of compounding.
FAQs
A 15% annual return rate is an assumption used for illustration purposes. It is an estimated rate. However, the actual returns can vary depending on market conditions and fund performance.
Yes. Many mutual funds allow SIP investments starting from as little as ₹500 per month. Some micro SIPs even offer SIP investments at ₹100. The amount of ₹15,000 in the 15×15×15 is simply part of the rule’s example.
Yes. The rule is beginner-friendly because it clearly demonstrates how regular investing without default and compounding can contribute to long-term wealth creation.
Compounding allows investment returns to generate additional returns over time. As the investment grows, the accumulated gains begin contributing significantly to the overall corpus, accelerating wealth creation.
