What is the DIGS Rule in Mutual Funds?
The DIGS rule in mutual funds is not a formally recognized investment principle by any regulatory body like SEBI or AMFI, but it serves as a strategic framework to guide investors toward long-term financial success. The acronym DIGS can be interpreted as Direct, Index, Growth of Portfolio , SIP for long term providing a structured approach to mutual fund investing.
Direct (D) – Eliminate Unnecessary Costs
Investing in direct mutual funds eliminates the need for intermediaries, reducing expense ratios and improving overall returns. Regular funds involve commission payments to distributors, which eat into an investor’s profits.
By choosing direct plans, investors maximize compounding benefits, ensuring higher returns over the long term. For example, an investor choosing a direct equity mutual fund instead of a regular plan could see a difference of several lakhs over a decade due to saved commission costs.
Index (I) – Prefer Low-Cost Passive Investing
Index funds have gained popularity due to their low expense ratios and ability to outperform most actively managed funds over the long term. Unlike active funds, which attempt to beat the market, index funds replicate market indices like Nifty 50 and Sensex, offering stable and cost-effective returns.
Investors who prefer consistent and predictable growth can benefit from investing in index funds as they remove human biases and reduce fund management costs. For instance, data has shown that over 80% of actively managed funds underperform the index in the long run, making index investing a reliable strategy for wealth creation.
Growth of Portfolio (G) – Focus on Long-Term Compounding
The secret to substantial wealth creation lies in compounding and staying invested for the long haul. Rather than attempting to time the market, investors should focus on growth-oriented portfolios, ensuring that investments remain untouched for long periods.
Historically, investors who remained committed to their investments through bull and bear market cycles witnessed exponential portfolio appreciation. For instance, an investor who started an SIP of ₹10,000 per month in the Nifty 500 Index Fund in 2010 would have accumulated over ₹50 lakhs by 2024, thanks to compounding and disciplined investing.
SIP for Long Term (S) – Stick to Systematic Investments
Systematic Investment Plans (SIPs) are the best strategy for mitigating market risks and ensuring wealth creation over time. Instead of investing lump sums and trying to time the market, SIPs enable rupee cost averaging, reducing the impact of volatility.
Long-term investing through SIPs allows investors to accumulate units at varying price points, ultimately leading to superior returns. Investors who continued their SIPs during market corrections in 2008, 2013, and 2020 saw significantly higher portfolio values during the recovery phases.
Understanding Small-Cap and Active Funds: Are They Really Better?
Many investors believe that regular mutual funds provide better returns than direct funds and that actively managed funds outperform index funds. In fact, 95% of regular fund advisors will tell you that the funds they recommend will give higher returns than index funds. However, in 90% of cases, this does not happen.
To invest in mutual funds the right way, using the DIGS formula can help achieve financial goals like children’s education, marriage, retirement, and home purchase effortlessly through SIP investments. Additionally, for those looking to analyze mutual funds independently, platforms like www.investt.in provide tools such as rolling returns, live SIP returns, point-to-point returns, fund overlap analysis, and index comparisons to make better investment decisions.
Direct vs Regular Funds: Which One to Choose?
One of the most important decisions in mutual fund investing is choosing between direct vs regular funds. Direct funds allow investors to invest directly with the mutual fund company, eliminating distributor commissions and reducing the expense ratio. On the other hand, regular funds involve intermediaries who charge commissions, which gradually reduce returns over time.
Regular vs. Direct Mutual Funds: A Real-Life Example
Let’s take an example of two investors:
- 40-year-old government employee in 2014 who invested in SBI Magnum Midcap Fund (Regular Plan – Growth) based on an advisor’s suggestion, contributing ₹60,000 per month.
- 30-year-old IT employee in 2014 who unknowingly invested in the Baroda BNP Paribas Midcap Fund (Direct Plan).
Today, SBI Magnum Midcap Fund still holds a 4-star rating. However, the difference between regular and direct plans is significant:
- In regular funds, a 1% commission is deducted from your profits every year.
- In direct funds, no commission is charged, meaning your returns compound at a higher rate over time.
From 2006 to February 2025, let’s compare their SIP investments and final returns:
SBI Magnum Midcap Fund (Regular Plan)
- Investment Period: 134 months
- Total Investment: ₹80,40,000
- Final Corpus: ₹2,19,80,275
Baroda BNP Paribas Midcap Fund (Direct Plan)
- Investment Period: 134 months
- Total Investment: ₹80,40,000
- Final Corpus: ₹2,92,36,118
The difference of over ₹72 lakh is purely due to the commission and lower compounding in the regular plan. So, if you’re investing for the long term, always choose direct funds. Over time, the difference becomes massive.
DIGS formula for mutual fund investing.
The DIGS formula for mutual fund investing is a strategic approach that helps investors build wealth effectively while minimizing risks. Diversification plays a key role by spreading investments across large-cap, mid-cap, small-cap, and index funds, reducing risk exposure and enhancing long-term returns.
Investing regularly through Systematic Investment Plans (SIP) ensures that investors benefit from rupee-cost averaging, which helps mitigate market volatility over time. The Grow Steadily principle highlights the power of compounding and long-term commitment, reinforcing that wealth creation is a gradual process.
Finally, Staying Patient is crucial, as market fluctuations are inevitable, and emotional investing often leads to suboptimal decisions and losses.
DIGS Formula – The Right Way to Invest in Mutual Funds
- Always Invest in Direct Funds
Many investors believe regular funds provide better returns, but in reality, they come with hidden costs. A 1% commission is deducted annually in regular plans, reducing the overall corpus. Direct mutual funds eliminate unnecessary commissions, allowing returns to compound efficiently over time. - Choose Index Funds Overactive Funds
Many financial advisors recommend actively managed funds, but historical data reveals a different reality. From 2006 to 2025, if an investor had invested ₹60,000 per month in:- SBI Magnum Midcap Fund (Regular Plan) → Final Corpus: ₹8.3 crore
- Nifty Midcap 150 Index Fund → Final Corpus: ₹9.1 crore
The index fund outperformed the actively managed fund by ₹1 crore, proving that passive investing with lower fees and no commissions generates higher returns without requiring financial advisory recommendations.
Market Cycles and Mutual Fund Performance
Why You Shouldn’t Chase Past Performance
Market cycles fluctuate, and small-cap stocks often go through high-growth and sideways phases. For instance:
- 2004-2008: The small-cap index delivered 550% returns in just four years.
- 2020-2024: Small caps surged 489% in 4.5 years, but a prolonged sideways market is now likely.
Investors often chase high-return small-cap funds without considering long-term sustainability. However, historical data shows that small-cap cycles can remain stagnant for years. DIGS rules emphasize patience and long-term vision, making it crucial to:
✅ Have an investment horizon of at least 12 years
❌ Avoid expecting fixed or guaranteed returns
✅ Prepare for extreme volatility
Unlike fixed deposits, mutual funds require strong discipline and patience to generate substantial returns.
Track Your Portfolio Growth – Not Just Ratings
Investing in mutual funds means buying stocks from indices like Nifty 500. The goal should always be:
🔹 To achieve higher returns than the index
🔹 To ensure the portfolio consistently outperforms the market
If the Nifty 500 delivers 17% returns, your portfolio should aim for 18% or more. If Nifty 500 gives 10%, your portfolio should not fall below 11%.
Many investors blindly follow star ratings, but no fund maintains top ratings permanently. Instead, check whether your portfolio beats the index regularly.
🚨 Warning: If you hold more than 10 mutual funds, your returns are likely to be lower than the Nifty 500. A review of 400+ Telugu investor portfolios revealed that those with 10+ funds underperformed significantly. To improve returns, compare your portfolio with Nifty 500 and make necessary adjustments.
SIP: The Ultimate Wealth-Building Tool
Many investors believe in SIP but hesitate to make lump sum investments. While lump sums require careful planning, SIP is the safest, most effective method for achieving long-term financial goals.
How ₹1 Lakh SIP Can Help You Achieve Major Goals
Assuming a 14.5% annual return (Nifty 500’s 10-year average), a ₹1 lakh SIP can help fund:
🏫 Children’s Education
💍 Marriage Planning
🏡 Home Purchase
🏖 Retirement Planning
If you increase returns by just 1%, financial goals can be achieved even faster!
How to Apply DIGS Rule in Portfolio
Applying the DIGS rule in portfolio management requires a structured approach to investment. Diversification is key—spreading investments across large-cap, mid-cap, small-cap, and index funds reduces risk while capturing growth potential.
For instance, an investor could allocate 40% in large-cap funds (e.g., HDFC Top 100 Fund), 30% in mid-cap funds (e.g., Mirae Asset Midcap Fund), 20% in small-cap funds (e.g., SBI Small Cap Fund), and 10% in index funds (e.g., UTI Nifty 50 Index Fund) to create a balanced portfolio.
Additionally, sectoral and thematic funds, such as technology and healthcare funds, can be included in smaller proportions (5-10%) for investors looking for high-growth opportunities. However, these funds come with higher volatility and should be approached with caution.
Rebalancing the portfolio every 6-12 months ensures that the asset allocation remains aligned with investment goals. For instance, if small-cap funds have surged significantly, reallocating excess profits into large-cap or index funds can help maintain stability and optimize long-term returns.
Long-Term Wealth Creation with DIGS
For investors seeking long-term wealth creation with DIGS, the strategy prioritizes consistency over speculation. A properly diversified portfolio, maintained through SIPs, provides stability even during volatile market cycles.
For example, an investor who started an SIP of ₹10,000 per month in the Nifty 500 Index Fund in 2010 would have accumulated over ₹50 lakhs by 2024, thanks to compounding and disciplined investing. This demonstrates the importance of long-term commitment and avoiding frequent portfolio churn.
Additionally, setting goal-based investing strategies under the DIGS framework ensures that investments align with specific financial objectives, such as retirement planning, children’s education, homeownership, or early financial independence. By continuing SIPs even in market downturns and periodically reviewing asset allocation, investors can maximize wealth accumulation over extended periods.
Best Small-Cap Funds for High Growth
For aggressive investors, selecting the best small-cap funds under the DIGS framework can yield significant returns. Small-cap funds have historically outperformed large-cap and mid-cap funds in bullish market phases but come with higher volatility.
Investors must ensure that their investment horizon is over 12 years to ride out market cycles. For instance, the Nippon India Small Cap Fund and Quant Small Cap Fund have delivered impressive returns over the past 10 years, averaging over 20% CAGR. However, it’s crucial to limit small-cap fund allocation to 15-20% of the total portfolio to balance risks effectively.
Furthermore, investors should consider factors such as rolling returns, fund management strategy, sector allocation, and expense ratio before investing in small-cap funds. Periodic portfolio rebalancing and a long-term approach are essential to maximize the benefits of small cap investing. Additionally, using SIP mode instead of lumpsum investments can help mitigate volatility and reduce downside risks over time.
FAQs on DIGS Rule in Mutual Funds
1. What is the DIGS Rule in Mutual Funds?
The DIGS Rule is an investment strategy that stands for Direct Funds, Index Funds, Growth Investing, and SIPs. It helps investors maximize returns by avoiding unnecessary costs, choosing passive funds, and staying invested for the long term.
2. Why should investors follow the DIGS Rule?
The DIGS Rule helps investors reduce costs, avoid high expense ratios and commissions, and achieve long-term financial growth by focusing on cost-efficient, market-beating strategies.
3. Who can benefit from the DIGS Rule?
Any investor—whether beginner or experienced—looking for a simple, effective, and low-cost investment approach can benefit from this rule. It is especially useful for long-term investors aiming for wealth creation.
4. When should you apply the DIGS Rule in investing?
Investors should follow the DIGS Rule from the start of their mutual fund journey to avoid common mistakes like investing in high-cost regular plans or chasing short-term gains.
5. How does the DIGS Rule improve mutual fund returns?
The rule ensures higher returns by eliminating agent commissions, reducing fund management fees, and leveraging index-based compounding through long-term SIP investments.
Conclusion:
The DIGS Rule—Direct Funds, Index Funds, Growth Investing, and SIPs—offers a cost-effective, structured approach to long-term wealth creation. By eliminating unnecessary costs, prioritizing low-cost index funds, leveraging compounding, and maintaining disciplined SIPs, investors can maximize returns with simplicity and consistency.
Avoiding past performance chasing and rebalancing portfolios periodically ensures optimal asset allocation. Whether for retirement, education, or wealth accumulation, the DIGS strategy provides a sustainable path to financial success, helping investors navigate market cycles and build a high-performing portfolio.
