How Does Rupee Cost Averaging Benefit Mutual Fund Investors?

How Does Rupee Cost Averaging Benefit Mutual Fund Investors?

Last Updated: Jun 17, 2021 - 05:23 pm 178.4k Views
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If you have been investing in equity mutual funds through a systematic investment plan (SIP), then you would have surely heard of a concept called rupee cost averaging (RCA). For example, if you spread your investments across 12 time periods in a year, then you are likely to catch lower price points; this will reduce your overall cost of holding the fund.

RCA benefits equity fund investors in four different ways.

It reduces your overall cost of holding in volatile markets

One can argue that you are better off investing in lumpsum amounts in a perpetual bull market and hold on to them. However, two problems arise here: Firstly, nobody knows the bottom; hence, the question ‘where to buy?’. Secondly, bull markets generally last for 2-3 years in a span of 10, but you need to continue investing throughout this 10-year-period. The example below will illustrate how RCA works in your favor.

Month

Lumpsum

Alpha Fund NAV

Monthly SIP

Units Allotted

Cumulative Units

Jan 2017

Rs1,20,000 invested in Alpha Fund on January at NAV of Rs25 allotting 4,800 units at the start of the year

25.00

Rs10,000

400.00

400.00

Feb 2017

26.20

Rs10,000

381.68

781.68

Mar 2017

25.15

Rs10,000

397.61

1,179.29

Apr 2017

24.00

Rs10,000

416.67

1,595.96

May 2017

23.25

Rs10,000

430.11

2,026.07

Jun 2017

22.15

Rs10,000

451.47

2,477.54

Jul 2017

21.25

Rs10,000

470.59

2,948.13

Aug 2017

20.40

Rs10,000

490.19

3,438.32

Sep 2017

22.30

Rs10,000

448.43

3,886.75

Oct 2017

22.50

Rs10,000

444.44

4,331.19

Nov 2017

 

23.25

Rs10,000

430.11

4,761.30

Dec 2017

 

23.50

Rs10,000

425.53

5,186.83

 

Lumpsum Units

NAV

Lumpsum Value

SIP Units Allocated

Closing SIP Value

Year-End

4,800

23.50

Rs1,12,800

5,186.83

Rs1,21,891

As can be seen in the above table, the lumpsum investor is sitting on a loss at the end of the year, while the SIP investor acquired more units during the year due to the power of RCA. That is how RCA makes volatility work in favor of the SIP investor.

SIP instills investing discipline

In the long run, investing is less about great stock selection and more about discipline. The longer you successfully invest a fixed amount on a regular basis, the more wealth you are going to create over a longer period. The table below captures how the wealth ratio goes up drastically by maintaining disciplined investing over a longer period of time.

How a SIP of Rs10,000 per month at 15% CAGR generates wealth over time

Particulars

5-Year SIP

10-Year SIP

15-Year SIP

20-Year SIP

25-Year SIP

Monthly SIP

Rs10,000

Rs10,000

Rs10,000

Rs10,000

Rs10,000

CAGR Returns

15%

15%

15%

15%

15%

Total Invested

Rs6 lakh

Rs12 lakh

Rs18 lakh

Rs24 lakh

Rs30 lakh

Final Value

Rs8.97 lakh

Rs27.87 lakh

Rs67.69 lakh

Rs1.52 crore

Rs3.28 crore

Wealth Ratio

1.495 times

2.323 times

3.761 times

6.333 times

10.9333 times


The power of discipline in investing is a result of RCA. As the time frame of this discipline increases, you can see the wealth ratio also going up substantially.

It saves you from having to time the market

It is not only hard to time the market and even more impossible to do so on a constant basis. Anyone who says that he can catch the tops and the bottoms of the market is either a God or a liar. What RCA does is that it saves you the hassle of trying to find the bottom and the top of the market. It has also been observed that market timing does not really add too much value to your returns over longer periods of time. Instead, if you continue to invest in equities in a disciplined manner, then the impact on your wealth is going to be much greater. That is what RCA helps you to achieve.

At a more practical level, the reason RCA works is that it synchronizes with your inflows. Hence, you are not forced to terminate your SIPs in the middle. This is one of the most important reasons why RCA is successful!

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