Many see investing in mutual funds as a good way to grow one’s wealth. However, as there are a wide variety of mutual fund options available, finding one that’s right for you is the first challenge. Then, just when you think you’re sorted, the second and third pop up: How much should you invest? How long should you hold on to the fund you have invested in? While there are no shortcuts to address the first challenge, there is a rule that can help you with the other two. The 15x15x15 rule in mutual funds helps you know what investment duration is best for you.
In this article, we will explore how to use this rule, its advantages and limitations, and the alternatives available.
Understanding the 15x15x15 rule in mutual funds
The 15x15x15 rule is essentially a simple formula. It helps determine how much to invest and the appropriate length of time to hold on to a mutual fund investment to earn ₹1 crore. Read on to learn about it.
Definition and explanation of the 15x15x15 rule
The 15x15x15 rule is an investing rule that some investors swear by. It helps tell you how much you should save and how often, to reach the goal of ₹1 crore. The rule states that an investor can create a corpus of close to ₹1 crore by investing ₹15,000 per month for 15 years in a row in a mutual fund that generates 15% average returns via compounding.
This rule is based on the idea of compounding. We will discuss this in greater length below.
How does the 15x15x15 rule work in practice?
The 15x15x15 rule works in practice through what they call the power the compounding. Compounding is a phenomenon in the world of investing. It refers to the ability of an asset to generate returns that are then reinvested. In this way, compounding keeps enhancing the value of initial investments. Compounding is, therefore, what lets you grow your wealth quickly.
So, if an investor invests 15,000 each month, they invest ₹1,80,000 in the first year. A 15% interest rate would mean that ₹2,07,000 is available for investment in the next year, along with the ₹1,80,000 you set aside. In the third year, this will again compound and yield ₹4,45,050… and so on. In the end, you will have a much larger sum, although you merely invest ₹21.6 lakhs from your pocket.
Ultimately, though, the best strategy depends on your personal financial goals and risk tolerance. So, to get the best returns, you should consider consulting a financial advisor.
Advantages and limitations of the 15x15x15 rule
The 15x15x15 rule has its share of advantages as well as disadvantages. It is important to take all of them on board before using any such shortcuts to plan your investment.
Using this rule has a few obvious advantages. Obvious as they are, it helps to put them down on paper and examine them one by one.
1. Makes implementation easy: Unlike other methods that require extensive preparation, the 15x15x15 rule is very simple. Using it is tempting because it allows investors to begin their journey immediately. All you need is a clear idea of what you want to achieve and ₹15,000 per month for 15 years in a row.
2. Creates structure and routine: Many people struggle with productivity because they lack a clear plan of action or a consistent routine. By deciding to dedicate ₹15,000 per month for 15 years in a row, you will create a routine. This routine will help you focus and achieve your goals. It also enables you to stay motivated and on track, even when other distractions or responsibilities arise.
3. Sets up small, manageable steps: Many people struggle to be productive because they set over-ambitious goals that are hard to reach. The 15x15x15 rule helps break goals down into small, achievable steps. It is easier to save a small amount of money each month than a huge sum of money yearly.
1. One-size-fits-all approach: This tendency to offer a single universal solution doesn’t address individual differences. Each person has unique strengths, weaknesses, and abilities. And a rule like this doesn’t take that into account.
2. May limit access to newer opportunities: Because this rule encourages conformity, it may stifle creativity and lead to stagnation. Sometimes you may lose out on better trading opportunities because of your commitment to the plan.
Alternatives to the 15x15x15 rule of mutual fund investing
For investors who are not comfortable with this rule, there are other strategies that can help. For example, some investors hold on to mutual funds for a specific length of time, regardless of the annual holding period. Some focus on the fund’s performance and only sell if it is underperforming. A third option is to hold on until you reach a specific financial goal, such as saving for retirement or buying a home.
The 15x15x15 rule can be a valuable tool for investors, but it is not a one-size-fits-all solution. Investors should carefully consider their financial goals and risk tolerance before making investment decisions. Whether you use this rule or some other strategy, the key is to have a well-thought-out plan in place. Look at Systematic Investment Plans (SIPs) as tools you could use.
Is the 15x15x15 rule suitable for all types of mutual funds?
The 15x15x15 rule applies to specific scenarios. It aims to amass wealth through long-term investments in high-return stocks. It’s not universal for all mutual funds.
How does the 15x15x15 rule work?
The 15x15x15 rule advises reviewing mutual fund investments every 15 months and selling underperforming funds that lag peers by 15%.
What are the benefits of using the 15x15x15 rule in mutual fund selection?
The 15x15x15 rule suggests investing Rs. 15,000 per month via SIP in mutual funds, potentially accumulating substantial wealth over time.