The concept of rupee cost averaging lies in averaging out the cost of your investments over time. Market volatility is part of equity investments; reflect the ups and downs of the economy. The core principle of investing is simple” purchase an asset at a low price and sell it at a higher price” and earn returns. Every strategy, analysis, and investment approach you read about is to help ensure that you buy low and sell high.
Rupee cost averaging is an approach in which you invest a fixed amount of money in regular periodical intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high. Market volatility is mitigated to some extent, and as a result, the overall gains will increase. It is best suited for investors who do not have knowledge and expertise in investments, new to the capital markets and salaried individuals who want to invest their monthly savings. The real benefit of rupee cost averaging is seen when the market is volatile and for a long term investments.
The rupee cost averaging effect averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments.
Here I will give you an example
let’s say that you want to invest ₹100,000 in good company stock, after analyzing the company’s fundamentals and valuations. The market price of the stock trading at ₹100 per share. You want to invest ₹25000 monthly for 4 months. In 1st month you purchased 100 shares. In 2nd month the stock price started dropping immediately to ₹75. It was a good thing that you didn’t invest the entire amount in 1st month. In 3rd month, the stock price reaches to ₹85. In 4th month the stock price raised to ₹125 per share
You bought total 250 shares at ₹100, 333 shares at ₹75, 294 share at ₹85 and 200 shares at ₹125. Therefore, the average purchase price is now ₹92.8. Your average purchase price reduced making it easier to book good returns.
But the things you need to take care in doing sip
Investment should be goal-oriented. You must analyse your financial goals before investing in SIP, link it to the goals. Such clear objectives give you a direction, certain idea about choosing the right
Analyse your risk appetite, it will help you choose right investment options.
You must do some research about the investment plan and analyse how it works.
Do not discontinue your investment when markets fall.
Portfolio diversification, monitoring and rebalancing (stop, pause, switch or reduce your SIP allocation) is important in active portfolio management.
Also ,the accumulated corpus must be looked over at the right stage to fund your goal and the risk appetite must be considered even if there are opportunities available in falling market, where short term good returns are visible.
Rupee Cost Averaging is an investment mode applied to regular fixed investments. Keep investing regularly and do not stop investing when the markets are down. It is necessary continue your sip in falling market to generate decent portfolio returns. For example, if we invested in Nifty 50 fund right before the markets crashed in 2020. You would have to invest continuously in this financial crisis for good amount of profits in future.
Conclusion
If the market grows contiguously in to the future, lump sum investments gives greater returns sometimes as compared to sip. Investing during the phase while market is bearish and existing when bullish will promise good returns in SIP. Also, an investment requires constant monitoring of market. Rupee cost averaging doesn’t guarantee profits, it is just an investment mode. It certainly gives you an idea how a systematic approach to investing will effective in creating wealth to achieve your goals. This is good for small investors to save small amount their savings to get average returns.
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