What is rupee cost averaging?
To be able to earn high returns from the market, it’s important that you buy low and sell high. However, most people, especially new investors, end up doing the opposite because they try to time the market in a bid to figure out the highs and lows. Since timing the market is extremely difficult, if not outrightly impossible, they inevitably end up with losses because they buy at highs and sell at lows.
The investment strategy that is deployed to overcome the challenge of timing the market is rupee cost averaging, a concept also employed by mutual fund systematic investment plans (SIPs). It involves investing a fixed amount at predefined, periodic intervals, irrespective of the market movement or asset price.
Putting in a fixed amount means that when the market falls, you end up buying more number of units, and when the market rises, you buy fewer units. Over time, the purchase price or cost of buying mutual fund units averages out, which is referred to as rupee cost averaging. Consistent investment over long periods means that the cost of purchasing reduces, increasing your gains.
How does it work?
Per unit cost with SIPs: Rs.18.8
Per unit cost with lump sum: Rs.20
Benefits
Tackles volatility
It helps deal with market volatility because a fixed amount is invested regularly, irrespective of the market highs and lows.
Avoids timing
One doesn’t need to time the market, looking for lows and highs, as the money is invested regularly.
Reduces cost
Over a longer investing time frame, the cost of units comes down, increasing the gains.
Ease of investing
Investors can choose the amount they are comfortable with instead of putting in a lump sum.
Discipline
It rules out impulsive exit and entry and inculcates disciplined investing for the longer term.
