Rupee cost averaging - Meaning, Relationship with SIP, how it works, and its benefits
Every investor dreams of investing in the equity markets when the prices are low and selling the investments when the markets are high. However, no one can predict the market movements beforehand, and attempting to do so often leads to losses and missed opportunities. Market conditions can change rapidly due to various factors, including economic indicators, geopolitical events, and investor behaviour, which are impossible to predict.
In a bid to predict market movements, many investors find themselves caught in a cycle of hesitation, waiting for the perfect moment that may never arrive. Hence, instead of trying to time the market, investors should rather focus on systematic, disciplined investment and time in the market. This highlights the importance of having a systematic investment strategy that leverages the benefit of rupee cost averaging, eliminating the need for market timing. In this blog, let’s look at what rupee cost averaging is, how it is related to SIP, how it works, and its benefits.
What is Rupee Cost Averaging?
Rupee Cost Averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of the price of the asset or market conditions, making it synonymous with systematic investment plans (SIPs) in mutual funds. This strategy ensures that you buy more units when prices are low and fewer units when prices are high, which helps lower your average cost over time.
Rupee Cost Averaging and Systematic Investment Plan (SIP)
Rupee cost averaging is an inherent benefit of SIPs. The concept of Rupee Cost averaging lies at the heart of SIPs. Through an SIP in mutual funds, investors can invest a fixed amount at predetermined intervals in a mutual fund, leveraging the benefit of rupee cost averaging. Leveraging the concept of rupee cost averaging through SIPs, investors buy more units when prices are low and fewer units when prices are high, effectively averaging out the cost of their investments over time.
Moreover, by consistently investing regardless of market conditions, investors reduce the impact of volatility and minimise the risk of making poor timing decisions. Additionally, this disciplined approach fosters a habit of saving and investing, which can lead to greater wealth accumulation in the long run.
How does Rupee Cost Averaging work?
When investments are made through SIP, investors invest a fixed amount at regular intervals. Through the Rupee Cost Averaging benefit of investing in mutual funds through SIPs, investors can purchase more units when the markets are at a discount and fewer units when markets are at a premium. This averages out the cost of investment as compared to purchasing units through the lump sum mode of investment. Let’s look at this with the help of the table below.
| SIP investment | Lump sum investment | ||||
|---|---|---|---|---|---|
| Months | Total monthly investment | NAV | Units Received | Lump sum investment | Total units purchased |
| January | 10,000.00 | 10.00 | 1,000.00 | 1,20,000.00 | 12,000.00 |
| February | 10,000.00 | 9.50 | 1,052.63 | - | - |
| March | 10,000.00 | 9.20 | 1,086.96 | - | - |
| April | 10,000.00 | 8.60 | 1,162.79 | - | - |
| May | 10,000.00 | 9.00 | 1,111.11 | - | - |
| June | 10,000.00 | 10.30 | 970.87 | - | - |
| July | 10,000.00 | 10.90 | 917.43 | - | - |
| August | 10,000.00 | 11.00 | 909.09 | - | - |
| September | 10,000.00 | 10.70 | 934.58 | - | - |
| October | 10,000.00 | 9.00 | 1,111.11 | - | - |
| November | 10,000.00 | 8.40 | 1,190.48 | - | - |
| December | 10,000.00 | 8.00 | 1,250.00 | - | - |
| SIP | Lump sum | |
| Total investment | 1,20,000.00 | 1,20,000.00 |
| Total units purchased | 12,697.05 | 12,000.00 |
| Average cost per unit | 9.45 | 10.00 |
The longer your investment horizon is, the lower will be the average cost per unit of investment. The benefit of the average price is evident in the above table. Hence, through rupee cost averaging, you can -
- Buy more units when the price is low
- Buy fewer units when the price is high
- Invest at an average cost
Benefits of Rupee Cost Averaging
- Mitigates market volatility - Since investment is made regularly regardless of market conditions, by investing a fixed amount regularly, you buy more units when prices are low and fewer when prices are high, averaging your purchase cost over time. This also reduces the investors’ market timing risk.
- Discipline - Through the rupee cost method of investing, one can inculcate discipline in their investment journey. Regular investments, irrespective of market conditions, foster a disciplined saving habit, helping investors stick to their financial objectives without being swayed by emotions.
- Accessibility - With this method of investment, investors can invest small sums of money on a regular basis. This allows investors to enter the market without needing a large lump sum, making it accessible for those with limited capital.
- Flexibility - Investment through this mode can be started and stopped as per the investor's will. However, it is advisable to continue the investment journey for the long term to fulfil financial needs and build wealth.
- Power of compounding - The consistent investments, when piled up, create a compounding effect. Hence, in the long term, this approach can take advantage of compounding returns over time, leading to potentially greater wealth accumulation.
Conclusion
To conclude, rupee cost averaging is an efficient method of investing that allows investors to build wealth in a disciplined manner in the long term. Systematic investment Plans (SIPs) in mutual funds work on this method of investment. By incorporating SIPs in your investment portfolio, you can inculcate discipline and consistency in your investment journey. Moreover, with patience and commitment towards investing for the long term, investors can fulfil their financial needs and build wealth.
To invest in mutual funds, investors should seek the guidance of a mutual fund distributor. A mutual fund distributor can understand the financial needs and risk profile of an investor and guide them in their investment journey. Open an NJ E-Wealth account to get guidance from a dedicated mutual fund distributor and succeed in your investment journey.
Frequently Asked Questions (FAQs)
1) What is rupee cost averaging?
Rupee cost averaging is an investment strategy that involves regularly investing a fixed amount of money in a particular asset or fund, regardless of its price at the time of purchase.
2) What is SIP (Systematic Investment Plan)?
An SIP follows the concept of rupee cost averaging. Through SIP, investors can invest a fixed amount of money at regular intervals in mutual funds.
3) How can I invest through rupee cost averaging?
To leverage the concept of rupee cost averaging, investors can opt for a systematic investment plan (SIP) in mutual funds. To get personalised guidance on following the most suitable investment strategy, investors can open an NJ E-Wealth Account and get the guidance of a dedicated mutual fund distributor.