Rupee cost averaging is averaging the price of buying units of a mutual fund. A key driver of equity investment is market volatility, which reflects the unpredictability of the economy. The law requires that goods are purchased in bulk when they are cheaper, and demand decreases when prices rise.
Rupee cost averaging works best when the market is turbulent. Investors can buy less when the market is high and more when the market is low. A Systematic Investment Plan (SIP) is a simple investment plan that does this by utilizing Rupee cost averaging.
What is SIP Rupee Cost Averaging?
The basic concept of Rupee Cost Averaging in Systematic Investment Plan (SIP) is to generate profit through investment. Investors are advised to buy stocks when the market goes down and sell when the market goes up. Due to a lack of investment knowledge, many investors tend not to consider investing in mutual funds in a panic of loss. Investors tend to buy when the market is rising and sell when the market is falling.
Rupee cost averaging strategy helps to take advantage of the market highs and lows which are beneficial for investment. When an investor sets a specific investment amount each month through a mutual fund, the value per unit can be averaged. This strategy also helps investors buy more units when the market is low. This process lowers the average cost to the investor of each unit. Investors are required to make small investments over a period of time, introducing her SIP concept to mutual funds.
Let’s look at an example. Richa invests INR 10,000 monthly in his SIP’s equity mutual fund. Considering the market has been volatile for months, her investments are reflected in the table below.
Average Net Asset Value (NAV) by Rs Cost Average Cost for each unit is as low as INR 99.6 (INR 598/6). If Richa does not choose her SIP and chooses to invest his sum amount round, according to his NAV for January, the number of units would be 600 (INR 60,000 / INR 100).
Currently, six months from now, investment by SIP method is June (NAV is 100 rupees). If she invests the round total amount, the value remains at her INR 60,000 (calculated – 600 units multiplied by her NAV for June). Further, in her SIP method using the strategy of rupee cost averaging, the value would be like her INR 60,401 (calculation – INR 604.01 multiplied by her NAV in June). This clearly shows that the SIP option has a higher return than the lump sum method.
Features of the Rupee Cost Averaging Method
Although the concept of rupee cost averaging is relatively new, it has gained popularity among smart investors. The Rupee Cost Averaging strategy is to make a profit from the market without the usual risks of the stock market.
Let’s take a look at the features of the Rupee Cost Averaging method.
Averaging the cost of acquiring units in a mutual fund is the idea behind rupee cost averaging. Regardless of the mutual fund’s net asset value (NAV), an investor in the mutual fund is required to make certain investments in one or more schemes each month. In volatile markets, this helps investors manage their overall costs.
Rupee cost averaging helps investors reduce the complexity of investing. Investing in a set calendar avoids the impossible task of trying to determine the exact time that is best for your investment. The Rupee Cost Average Effect balances unit costs, equalizing them and reducing the impact of market volatility on assets.
Rupee cost averaging does not actually guarantee profits, but it does help create wealth and shows how successful the methodological approach can be in the long run.
Benefits of Rupee Cost Averaging
The advantages of rupee cost averaging are:
lower average purchase price
When an investor invests a round amount in a mutual fund, there is no opportunity to average out the investments. In this case, the average price remains the same as the purchase price. With Rupee cost averaging, your investment grows. Additionally, buying units when the base value is low will lower the average unit price.
Save capital from market volatility
Options traders are seasonal investors. They make volatility their best companion. The higher the volatility, the greater the profit. On the other hand, a single trade can wipe out small investors’ capital due to high volatility. This strategy protects investors from market volatility and saves principal.
Generally, the minimum investment in SIP is from INR 500 per month. Risk is minimal, so try to invest more. Analyze and monitor the growth of stocks to get an idea of the market before investing more money. With the rupee cost averaging method, investors can get higher returns with less investment .
The concept of rupee cost averaging can be used for hedging by some investors. The investor divides his total investment in half, investing the first half in Equity SIP and the second half in Debt SIP. A hedging plan ensures that NFV does not fall below the actual amount. Investors can choose the appropriate investment amount for each SIP by consulting with a professional money her manager.
Disadvantages of Rupee Cost Averaging
Despite its great advantages, the rupee cost averaging method has two drawbacks.
- Rupee cost averaging brings discipline, yes! But the amount remains the same regardless of market conditions.
- The exit load of rupee cost averaging may take a step back. Mutual fund houses typically impose exit charges on withdrawal of investments. Investors must pay an exit burden on the previous year’s investment amount.
How does rupee cost averaging work?
Markets are more unpredictable than they used to be. Rupee cost averaging is a fast-growing over-the-counter market. Investors should start investing early to have a secure financial future. Rupee cost averaging is the best approach towards investing.
Rupee cost averaging helps investors to maximize the return on their assets and allows them to balance their investment costs by buying in both falling and rising markets. Add more units with the same investment when the market is crashing.
The rupee cost averaging method has the advantage of being freed from the hassle of checking the market price on a daily basis and allowing stable investment. It puts investors at ease without the trouble and panic caused by market volatility. The Rupee Cost Averaging strategy is a money growth opportunity suitable for all types of investors, from beginners to savvy investors.
Investing in SIP through Rupee cost averaging enhances both psychological and financial discipline of the investor. It helps automate the complete procedure, minimizing guesswork about market ups and downs and the need to stay on top of when to invest. Investing early for the long term is much better because the returns are higher and are achieved with minimal effort and more discipline.
Frequently Asked Questions (FAQ)
What are the limitations of Rupee Cost Averaging?
The limitations of Rupee cost averaging are:
- Rupee cost averaging is a strategy to buy, not sell.
- No breaks are specified between each purchase.
- This method is well applied when stocks and markets work cyclically. For example, rupee cost averaging will not benefit the investor if the stock price only appears to be in a downtrend.
What is the concept used in Rupee Cost Averaging?
How Does Rupee Cost Averaging Help Mutual Fund Investors?
What is SIP?
What is the minimum investment to start SIP?