Why is Rupee Cost Averaging Important?
Systematic Investment Plans (SIPs) are one of the most popular ways of investing in mutual funds. Apart from being an accessible and easy way to invest, it offers several other benefits. One of the key benefits of SIP is rupee cost averaging (RCA)
In this article, we will take a detailed look at rupee cost averaging and how it can help you in your investment journey. Read on to learn more.
Rupee Cost Averaging: Meaning
In rupee cost averaging, an amount is invested at regular intervals, irrespective of the per unit price.
By investing regularly, the investor takes the benefit of investing across the market: both upmarket and downmarket. Think about it: if you started making investments regularly, and suddenly the market starts doing well, you may likely go overboard and make investments at very high valuations. Similarly, if the market crashes, the first course of action for many investors is to sell in panic.
In rupee cost averaging, you invest the same amount every month, meaning you buy more units at a lower price and fewer units at a higher price which brings down the average cost price.
The two key factors of rupee-cost averaging are commitment and discipline.
How frequently an investor invests is not very relevant over the long term.
What really matters is his/her commitment to the investment. Basically, if an investor is patient and can remain invested through an economic downfall, his/her chance at long-term capital appreciation will be immense.
Characteristics of Rupee Cost Average
- Rupee Cost Averaging is best suited for investors who do not have time to monitor the economic market
- Invest a certain amount of money at a fixed interval, irrespective of the unit price
Rupee Cost Averaging in SIP
Rupee cost averaging is one of the key features of investing through an SIP. If an investor invests a predetermined sum periodically, the person can enjoy the rupee cost averaging benefits. The investor will invest a sum regardless of the market conditions which allows the investor to accumulate units while bringing down the average cost of the investment.
How Does Rupee Cost Averaging Work?
|
Months |
Amount Invested |
Unit price |
No of units bought |
|
10th Jan 2017 |
10000 |
32 |
312.50 |
|
10th April 2017 |
10000 |
36 |
277.77 |
|
10th July 2017 |
10000 |
30 |
333.33 |
|
10th Oct 2017 |
10000 |
28 |
357.14 |
|
Total |
40000 |
31.23 (Average cost) |
1280.74 |
If the entire amount of Rs.40,000 is invested in January 2017, the number of units bought would be 1,250, as compared to 1,280 units acquired at the end of the year. Here’s where SIP allows an investor to reap the benefits of rupee cost averaging.
Rupee Cost Averaging Benefits
- Rupee cost averaging is an important mutual fund tool that helps investors get maximum value for their invested money in a volatile market
- Another key rupee cost averaging benefit is that it reduces the impact of market volatilities.
- Rupee Cost Averaging negates the effort required for monitoring the stock market daily
- It is flexible and offers better prospects for wealth accumulation
- It is a psychological satisfaction to the investor because the investments are in safe hands
Is SIP helpful in Bull or Bear Market?
A bull market refers to a market, that grows aggressively over a period of time.
A bear market is a situation when there is a considerable fall in the market, month on month.
The following table will give you an idea of investments made in both market scenarios
Bull Market
|
Months |
Amount Invested |
Unit price |
No. of units bought |
|
10th Jan 2017 |
10,000 |
32 |
312.50 |
|
10th April 2017 |
10,000 |
36 |
277.77 |
|
10th July 2017 |
10,000 |
40 |
250.00 |
|
10th Oct 2017 |
10,000 |
42 |
238.09 |
|
Total |
40,000 |
37.09 (Average) |
1078.29 |
Bear Market
|
Months |
Amount Invested |
Unit price |
No Of units bought |
|
10th Jan 2017 |
10,000 |
32 |
312.50 |
|
10th April 2017 |
10,000 |
30 |
333.33 |
|
10th July 2017 |
10,000 |
25 |
400.00 |
|
10th Oct 2017 |
10,000 |
23 |
434.78 |
|
Total |
40,000 |
27.01 (Average Stock) |
1480.61 |
You can notice that the number of units increased during the bear market but the value of investment increased during bull markets. Both these forces give a combined effect in the long run and contribute to the power of compounding.
Final Word
Rupee cost averaging is an essential tool for investors who wish to put their money in equity through mutual funds. Considering the unpredictable nature of the market, averaging the cost of investment through disciplined investment would let investors obtain units at a relatively cheaper rate.
Happy Investing!