As an investor, my goal is to maximize long-term profit.

By adopting various means of investments, such as bank deposits, participation in the stock market, gold, mutual funds etcetera, the goal of long-term capital appreciation can be achieved.

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While an investor expects constant and stable growth in these instruments over time, some element of risk is always associated with it.

We believe if an investor seeks to beat inflation over time, he/she should opt for investment in mutual funds.

Why?

The reason is simple. Mutual funds provide healthy returns over the long-run.

Also, mutual funds have the ability to beat inflation in the current market environment.

So we’ve noticed that most investors try to time the market, but it is a known fact that no one can predict market conditions. Not even investment gurus.

Under these circumstances, the only answer is to adopt the Systematic Investment Plan (SIP) that provides rupee-cost averaging.

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 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 towards 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?

MonthsAmount InvestedUnit price

No of units bought

10th Jan 20171000032312.50
10th April 20171000036277.77
10th July 20171000030333.33
10th Oct 20171000028357.14
Total4000031.23 (Average cost)1280.74

If the entire amount of Rs.40,000 would be invested in Jan’17, the number of shares bought would be 1250, as compared to 1280 shares acquired at the end of the year.

Advantages of Rupee Cost Averaging

1.It is an important mutual fund tool that helps investors  get maximum value for their invested money in a volatile market
2. It can be used for hedging, if the market is moving downward
3. Rupee Cost Averaging negates the effort required for monitoring the stock market on a daily basis
5. It is flexible and offers better prospects for wealth accumulation
6. It is a psychological satisfaction to the investor, because the investments are in safe hands

Is SIP helpful in Bull or Bear Market?

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

MonthsAmount InvestedUnit priceNo. of shares bought
10th Jan 20171000032312.50
10th April 20171000036277.77
10th July 20171000040250.00
10th Oct 20171000042238.09
Total4000037.09 (Average Stock)1078.29

Assuming that the investor is selling all his units on 11th Oct 2017, he would realize Rs. 45,288.18 (1078.29*42).

This would translate to a profit of Rs 5288.18 on his total investment of Rs.40000.

Bear Market

MonthsAmount InvestedUnit priceNo Of shares bought
10th Jan 20171000032312.50
10th April 20171000030333.33
10th July 20171000025400.00
10th Oct 20171000023434.78
Total4000027.01 (Average Stock)1480.61

Assuming that the investor is selling all his bonds on 11th Oct 2017, he would realize Rs. 34054.03(1480.61*23).

This would result in a loss of Rs.5945.97 on his total investment of Rs.40000.

But in the long run, this may not work. As the market conditions fluctuate, the investor can wait until the price increases beyond Rs.32.

Since the number of shares he has is 1480.61, he can get Rs. 47379.52 (1480.61*32), which is a profit of Rs.7379.52.

Conclusion

In conclusion, we can say that the real benefit of rupee cost averaging is seen when the market is volatile and an investor is looking to invest for a long-term.

For short-term gain, rupee cost averaging works well in the bull market only.

For starting your SIP today, click here. You can also install our Android and iOS application to start your investing journey.

Should you have any queries, feel free to drop in a message to support@groww.in and we shall be grateful to assist you.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww