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| Rupee Cost Averaging (SIP) |
What is rupee-cost averaging?
Investors generally tend to speculate on the right time to invest. But it is a known fact that no one can predict where the market is going to move-upwards or downwards. Rupee-cost averaging has been the answer to such a scenario.
With rupee-cost averaging, an investor invests a specific amount at regular intervals irrespective of the investment’s share (unit) price. By investing regularly, the investor takes advantage of market dips without worrying about when they’ll happen. Their money buys more units when the price is low and fewer when the price is high, which can mean a lower average cost per unit over a period of time.
The key factor of rupee-cost averaging is commitment. How frequently an investor invests (weekly, fortnightly, monthly or quarterly) is not that much relevant in long term? What matters is to stick to his investment mode in tougher times like we experiencing now.
How does Rupee Cost Averaging works when prices are moving upwards and downwards?
Below are the two examples to see what an investor’s average price per unit would be when prices are rising and when prices are falling.
Unit price is rising scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this example would methodically acquire 244.53 units at an average cost of Rs.24.54 each
Rupee-Cost Averaging (unit price rising scenario)
Month
|
Amount Invested
|
Unit Price
|
No. of units purchased
|
15-Jan
|
Rs 1000
|
20
|
50
|
15-Feb
|
Rs 1000
|
22
|
45.46
|
15-Mar
|
Rs 1000
|
23
|
43.48
|
15-Apr
|
Rs 1000
|
25
|
40
|
15-May
|
Rs 1000
|
30
|
33.33
|
15-Jun
|
Rs 1000
|
31
|
32.26
|
Total: Rs 6000
|
Avg Cost:Rs 24.54
|
Total:Rs 244.53
|
Unit price falling scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this scenario would have bought 204.87 units at an average cost per unit of Rs.24.91.
By comparing, someone who invested the entire Rs.6000 in January at Rs.35 per unit would have owned only 171.43 units, and the investment would have been worth only Rs.4285.75 at the end of the period.
Rupee-Cost Averaging (unit price falling scenario)
Month
|
Amount Invested
|
Unit Price
|
No. of units purchased
|
15-Jan
|
Rs 1000
|
35
|
28.57
|
15-Feb
|
Rs 1000
|
33
|
30.30
|
15-Mar
|
Rs 1000
|
30
|
33.33
|
15-Apr
|
Rs 1000
|
28
|
35.71
|
15-May
|
Rs 1000
|
27
|
37.03
|
15-Jun
|
Rs 1000
|
25
|
40
|
Total: Rs 6000
|
Avg Cost: Rs 24.91
|
Total: Rs 204.87
|
Advantages of Rupee Cost Averaging (SIP)
Averaging reduces the risk factor associated with lump sum investing. For example we all are familiar with the scenario where investors who invested their money at one go when market was at its peak in the year 2007-2008 what their plight was when market crashed drastically in the year 2008. With RCA, investors get a buying opportunity when the NAV falls as he will be able to accumulate more units of the mutual fund scheme.
RCA frees investors from the onus of monitoring stock positions on a daily basis which would be the scenario in case of lump sum investment or VCA. It serves as a cushion against the downward trend of the market.
Investor no longer needs to look at dates, markets or anything. Investor no longer needs to monitor external factors like economy condition, interest rates, inflation etc.
It is a disciplined approach towards investing regularly in mutual funds. -
