“Rupee Cost Averaging” Power of Systematic Investment Plan
A Systematic Investment Plan called as SIP enforces a disciplined approach towards investing and inculcates regular saving habits, which we probably learnt in childhood when we had a piggy bank. Yes, those were the good old days when our parents gave us pocket money and we deposited savings in our piggy banks after expenditure. At the end of particular tenure, we saw that every rupee saved added up to a larger amount.
In developing economies like India, where stock markets can be highly volatile and it is rarely possible to time the market & predict the future; we can seldom accurately predict when a particular stock will move up or where the interest rates are headed.
How Rupee Cost Averaging Works?
When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower and buy less when the price is higher. Thus, you would reduce your average cost per unit over time. This strategy is termed as ‘Rupee cost averaging’. This is especially true for investments in equity. With a sensible and long term investment approach, this strategy can smooth out the market’s ups and downs and reduce the risks of investing in volatile markets.
Also Read: Best Time to Invest in SIP during Market Cash
SIP makes the volatility work in our favor. As a constant amount invested every month ends up buying more units at low prices & fewer units when the price is up. Thereby the average unit cost will always be less than the average sales price per unit, irrespective of the market rising, falling, or fluctuating.
For better understanding refer the table below as an example
|MONTH||AMOUNT INVESTED||RISING MARKET||FALLING MARKET||VOLATILE MARKET|
|NAV||Units Allotted||NAV||Units Allotted||NAV||Unit Allotted|
|Average Purchase Price||130||70||100|
|Average Cost Per Unit||126.10||62.33||97.96|
In the above table, we can see both average purchase price and the average cost per unit are different.
(Average cost per unit = Actual average acquisition cost under SIP) < Average purchase price
Benefits of Rupee Cost Averaging
- Rupee Cost Averaging helps investors to get the maximum benefit on their investments.
- It helps an investor to average out their investment cost by purchase in both falling & rising markets.
- It gives the investor more units for the same amount at the time of falling markets.
- Rupee cost averaging negates the aspect of tracking the market on a daily basis.
- Rupee cost averaging gives the benefit of gradual investments which help in avoiding the pitfalls of market volatility.
- It is a method that provides better prospects for wealth creation.
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Frequently Asked Questions
- What is a SIP?
SIP or Systematic Investment Plan is a disciplined way of investing. In this plan, the investor regularly makes a fixed amount of investment over the specified intervals like weekly, monthly, quarterly, etc.
- What is Rupee cost averaging?
Rupee cost averaging gives the benefit of averaging the investment cost in the falling and rising market. When you invest for regular intervals, you buy more units when the price is low and buy fewer units when the price is high. In this way, the average price will reduce over time and this concept is called Rupee cost averaging.
- What are the benefits of Rupee cost averaging?
There are many benefits of rupee cost averaging like it helps an investor to get the maximum benefit on their investment and helps to average out the investment costs in both falling & rising markets and therefore, produce higher returns over the long run. You can read all the benefits of RCA in our article here.
- Does rupee cost averaging offer any benefit in the volatile market?
Rupee cost averaging works best in the volatile market. As in the volatile market, you can see that markets move both sides i.e. downside and upside which leads to average out the costs of investment through regular investments.