Jargon Buster: Rupee Cost Averaging
Rupee Cost Averaging is an investment approach wherein one invests fixed sum of money at regular intervals in the securities market. This ensures that one ends up buying more shares (or units of Mutual Fund) when prices are low and less units when prices are high. This investment approach makes prudent sense as equity markets (in which equity mutual funds predominantly invest) go through cycles of volatility over a period of long term like 3 years, 5 years or 10 years. Many investors tend to carry out a highly risky task of timing the market , whether its entry point or exit point , which even professionals find it hard to assess. The rupee cost averaging approach averages out the cost of your units purchased over a period of time and hence lessens the effects of market fluctuation on your investments.
How does it work?
The purpose of rupee cost averaging is to lessen the risk of timing the market as it provides an average cost per share or units of mutual fund which tends to be lower over a long term period. Let us have a look at an example below, which essentially shows the fluctuating price over a period of 12 months (for illustration) which is how a real market behaves.
For Illustration Purpose only
Hence, we observe that when invested regularly over a period of 1 year (in this case), the number of units purchased is higher compared to someone who would have invested the same amount as lump sum at the beginning of the year. The cost price fluctuates every month as it happens in real markets, hence, instead of timing the market if one invests at regular intervals, the average cost generally tends to come down.
How to invest through Rupee Cost Averaging?
The simplest way to make use of this approach of investing is to invest through “Systematic Investment Plans” (SIP) into mutual funds. Retail investors, who either do not have the expertise to evaluate the equity markets or don’t have the time to actively manage their investments, can easily use SIPs as an investment tool to invest into equity mutual funds. This would not just help them to save regularly, but also use the approach of rupee cost averaging to efficiently create potential wealth for the investor over a longer period of time. This disciplined approach of investing can help an investor to improve their chances of better returns and build assets over time.
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