Why is Rupee Cost Averaging Important?
Market-related investments are associated with financial risk. However, one of the ways to beat the risk is to opt for mutual funds. Mutual fund schemes have the potential to beat inflation and offer substantial returns over the long run.
One of the ways to invest in mutual funds is through SIPs (Systematic Investment Plans). This investment mode comes with the benefit of rupee cost averaging (RCA).
What is Rupee Cost Averaging?
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).
The key factor of rupee-cost averaging is commitment.
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
1. Rupee Cost Averaging is best suited for investors who do not have time to monitor the economic market
2. Invest a certain amount of money at a fixed interval, irrespective of the unit price
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 would be invested in Jan’17, the number of units bought would be 1250, as compared to 1280 units acquired at the end of the year.
Advantages of Rupee Cost Averaging
- It is an important mutual fund tool that helps investors get maximum value for their invested money in a volatile market
- It can be used for hedging if the market is moving downward
- Rupee Cost Averaging negates the effort required for monitoring the stock market on a daily basis
- 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 | 10000 | 32 | 312.50 |
| 10th April 2017 | 10000 | 36 | 277.77 |
| 10th July 2017 | 10000 | 40 | 250.00 |
| 10th Oct 2017 | 10000 | 42 | 238.09 |
| Total | 40000 | 37.09 (Average) | 1078.29 |
Bear Market
| Months | Amount Invested | Unit price | No Of units bought |
| 10th Jan 2017 | 10000 | 32 | 312.50 |
| 10th April 2017 | 10000 | 30 | 333.33 |
| 10th July 2017 | 10000 | 25 | 400.00 |
| 10th Oct 2017 | 10000 | 23 | 434.78 |
| Total | 40000 | 27.01 (Average Stock) | 1480.61 |
You can notice that 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!