Rupee cost averaging is an indispensable concept when you are researching stock or mutual fund investments. It is a strategy that is frequently suggested for individuals who are new to the stock markets and investing. One can adopt the Systematic Investment Plan (SIP) path and gain from using the rupee cost averaging method if they lack the necessary experience and expertise to follow the market methodically. Continue reading to learn more about rupee cost averaging and how you can benefit from it.
What is Rupee Cost Averaging?
The practice of continually investing a specific sum at certain intervals despite high or low market conditions is known as rupee cost averaging. As a consequence, the investor may purchase more units at low prices and fewer units at high prices, supporting the fundamental investment maxim of ‘buy cheap and sell high.’
This practice is opposed to a one-time investment. By using a prudent and long-term investment approach, rupee cost averaging can smooth out the market’s ups and downs and lower the dangers of investing in erratic markets.
How Exactly Does Rupee Cost Averaging Operate?
One might analyse the example provided below to see how the investor profits from rupee cost averaging:
| Months | Amount Invested | Unit price | No of units bought |
| 20-Jan-17 | ₹10,000.00 | ₹34.00 | 294.12 |
| 20-Feb-17 | ₹10,000.00 | ₹36.00 | 277.78 |
| 20-Mar-17 | ₹10,000.00 | ₹32.00 | 312.50 |
| 20-Apr-17 | ₹10,000.00 | ₹28.00 | 357.14 |
| Total | ₹40,000.00 | ₹32.22 | 1,241.54 |
If the entire amount of Rs.40,000 had been invested in Jan’17, the number of units bought would have been 1176, as compared to 1241 units acquired at the end of April.
In a bull or bear market, is SIP useful?
A bull market refers to a market that grows aggressively over some period of time. A bear market is characterised by a significant monthly decline in the market.
From the table below, you may get a sense of the capital invested in both market conditions.
Bull market:
| Months | Amount Invested | Unit price | No of units bought |
| 20-Jan-17 | ₹10,000.00 | ₹30.00 | 333.33 |
| 20-Feb-17 | ₹10,000.00 | ₹35.00 | 285.71 |
| 20-Mar-17 | ₹10,000.00 | ₹40.00 | 250.00 |
| 20-Apr-17 | ₹10,000.00 | ₹44.00 | 227.27 |
| Total | ₹40,000.00 | ₹36.49 | 1,096.32 |
Bear market:
| Months | Amount Invested | Unit price | No of units bought |
| 20-Jan-17 | ₹10,000.00 | ₹42.00 | 238.10 |
| 20-Feb-17 | ₹10,000.00 | ₹38.00 | 263.16 |
| 20-Mar-17 | ₹10,000.00 | ₹32.00 | 312.50 |
| 20-Apr-17 | ₹10,000.00 | ₹28.00 | 357.14 |
| Total | ₹40,000.00 | ₹34.16 | 1,170.90 |
You’ll see that while the value of investments climbed during bull markets, the number of units grew during bear markets. In the long term, both of these factors combine to have an effect and add to the strength of compounding.
Characteristics of rupee cost averaging
- The strategy is appropriate for small investors (retail investors), who tend to remain consistent in their style of investing and can operate the SIP for a longer duration.
- The approach is best suited for individuals who do not watch or track the market often.
When is the average rupee cost most useful?
The following scenarios best qualify for the use of the rupee cost average:
- When an investor does not have a fixed amount of money available for investing.
- When investors want to create a fund and put money into investments for a future event.
- When an investor wants to make continual, fixed investments in a certain stock from a particular portfolio.
The Advantages of the Rupee Cost Averaging Method
The following are the benefits of rupee cost averaging:
- There is no need to research the “perfect moment to invest” when there is a predefined schedule which reduces guessing.
- It stops beginner investors from making investments based on speculative forecasts of the “all-time market low” or “all-time market high,” which offer little assurance.
- By averaging out the unit costs, this strategy reduces the burden of short-term market volatility on an investor’s investment.
- In general, investment costs will be lower than market prices.
- Long-term wealth creation may be accomplished through it successfully.
- The investor is then able to make selections in light of their monthly financial obligations.
Takeaways
Rupee cost averaging in SIP is a crucial instrument for investors who want to use mutual funds to invest in stocks.
SIP turns the stock market volatility to the investor’s advantage. This is because a fixed monthly investment buys more units when the price is low and fewer units when the price is higher.
As a result, regardless of how the market changes—rises or falls—the average unit cost always remains lower than the average sales price per unit.
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Frequently Asked Questions
Q: What are the two basic investment approaches?
Ans: Money can be put into investments either all at once, accumulated or periodically, called SIP.
Q: What advantage of rupee cost averaging is most significant?
Ans: The most significant advantage is that it enables the investor to properly handle market volatility through both financial and emotional investment discipline.
Q: Does rupee cost averaging guarantee profit?
Ans: Unfortunately, no. Rupee cost averaging does not guarantee profits. Nonetheless, it frequently demonstrates how an SIP can be advantageous in terms of long-term wealth creation.
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