Rupee Cost Averaging, lets the investor invest a fixed amount of money at regular intervals at the market price (NAV) for a defined period. This principle is fundamental to the functioning of SIPs (Systematic Investment Plans) and averages out the cost at which the units of a particular fund are bought. The key benefits of applying this principle in our investments are as follows:
- Scales down market volatility
Various economic conditions result in a fluctuating market. Rupee Cost Averaging helps to average out the fluctuating prices by acquiring fewer units in a high priced market and compensating with more units in a low priced market.
- Eliminates the need to time the market
Monitoring market conditions and predicting the ideal periods for investment is a hard task to accomplish. Rupee Cost averaging overcomes this tedious process of market watch and spreads out the investment evenly across various market conditions.
- Best result in a Bear market
Usually investors are prone to invest in a rising market and abandon in a falling market, which is actually the opposite of what ought to be done. Rupee Cost Averaging ensures that the investor remains invested in a falling market and leverages it by acquiring more units as the market price decreases.
The following table is an example how Rupee Cost Averaging functions in a fluctuating market condition:
(NAV in Rs.)
|5 Jan 2017||10,000||56||178.57||10,000||178.57|
|5 Feb 2017||10,000||56||178.57||20,000||357.14|
|5 Mar 2017||10,000||57||175.44||30,000||532.58|
|5 Apr 2017||10,000||57.5||173.91||40,000||706.49|
|5 May 2017||10,000||59||169.49||50,000||875.98|
|5 Jun 2017||10,000||60||166.67||60,000||1,042.65|
|5 Jul 2017||10,000||58||172.41||70,000||1,215.06|
|5 Aug 2017||10,000||57||175.44||80,000||1,390.50|
|5 Sep 2017||10,000||55||181.82||90,000||1,572.32|
|5 Oct 2017||10,000||53||188.68||1,00,000||1,761.00|
|5 Nov 2017||10,000||51||196.08||1,10,000||1,957.08|
|5 Dec 2017||10,000||50||200.00||1,20,000||2,157.08|
Note: An example of Monthly SIP Investment
In the above example, the investor has accumulated a total of 2,157.08 units at an average cost of Rs. 55.80 by investing Rs. 1,20,000. However, the same amount of Rs. 1,20,000 as Lump sum would have fetched lesser units had he invested it in the any of the first 8 months.
Although, the investor could have acquired more units in Lump sum investment as compared to SIP in any of the last 4 months, but that would call for precise market timing which is hard to achieve.
Rupee cost averaging is synonymous to perseverance in a highly volatile market condition. It is a very important tool to make the most of the short term irregularities in the market, provide flexibility to the investor, encourage discipline in investing habits and ensure his sustained presence in the market.
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