Rupee cost averaging is the concept of average out the price at which you buy mutual fund units. Equity investments are primarily influenced by market volatility, which reflects the unpredictability of the economy. According to the law's definition of demand, people buy more of a good when it's less expensive, and less of it when the price goes up.
The rupee cost averaging method performs best in challenging market conditions. Investors should buy more when the market is cheap and less when it is expensive since doing so helps them.
What is Rupee Cost Averaging?
The rupee cost averaging approach is relatively new but hugely popular among sensible investors. The strategy helps them make a profit from the market without taking risks typical of the equity market.
Generally, investors make losses because they think they can time the market efficiently. However, timing the market is extremely challenging, if not impossible. Millions of investors worldwide have lost their entire capital trying to time the market. The rupee cost averaging approach lets you think differently and balance your investment.
In the rupee cost averaging strategy, you invest a fixed amount in one or more mutual fund schemes every month, irrespective of the fund's Net Asset Value (NAV). When the NAV is low, your account gets credited with more units. In contrast, when the NAV is high, you get fewer units. As an investor, you do not worry about the fluctuations in the NAV since your investment amount remains the same every month. Alternatively, you may invest once every quarter or half-yearly.
The rupee cost averaging approach lets you sail over the short-term volatility in market prices to reap rich dividends in the long term. Systematic Investment Plan or SIP is a classic example of this approach.
Characteristics of Rupee Cost Averaging
● Averaging out the cost: The idea behind rupee cost averaging is to average out the price at which you acquire mutual fund units. Regardless of the fund's Net Asset Value, you make a specified monthly investment in one or so more mutual fund schemes (NAV). This helps you curb the overall cost in a volatile market.
● Reduces the complexity of investment: You may avoid the difficult or perhaps impossible task of attempting to determine the precise optimum moment to invest by investing on a set timetable. The rupee cost averaging effect equalizes your unit expenses, which lowers the impact of short-term market fluctuations on your assets.
● Helps to generate wealth: Even though rupee cost averaging will not really ensure profits, it does show how a methodical approach to investing may be quite successful in building wealth in the long run.
Advantages of Rupee Cost Averaging Strategy
1. The Average Purchase Price Comes Down
When you invest a lump sum in a mutual fund, you do not get the opportunity to average out your investment. Hence, in this case, your average price remains the same as the purchase price. However, when you take the rupee cost averaging approach, your investment gets spread out. Moreover, as you buy more units when the NAV is low, the average price per unit decreases.
Therefore, the rupee cost averaging approach lets you get more units at less price and strike gold when the market goes up.
2. Saves Your Capital From Volatility
Seasoned investors, especially options traders, make volatility their best friend - the higher the volatility, the bigger the profits. However, for a small investor, high volatility can wipe out their capital in a single trading session. The rupee cost averaging approach lets you protect your capital from the harmful effect of volatility. For example, if the market crashes due to extreme volatility, you will get more units. And, when the market eventually goes up, so will your profit margin. Therefore, the rupee cost averaging strategy offers you respite from working overtime during volatile periods and protects your capital from eroding.
3. Easy-on-the-Pocket Investment Amount
SIP investments generally start from INR 500 per month. But, if possible, try investing something more. Since the risks are minimal, you can invest a higher amount without any worry. However, before investing a high amount, try to analyze the growth potential of the stocks in general and the market in particular. For example, if you invest in a mutual fund tracking the Realty Index, you must know about the companies comprising that index and their growth potential. Therefore, rupee cost averaging lets you invest less and earn high returns.
4. Use it For Hedging
Some investors use the concept of rupee cost averaging to hedge their investment. They divide their total investment into two equal portions. They invest the first portion in equity SIP(s) and the second in debt SIP(s). Generally, when the equity market rises, debt market growth remains muted, and vice versa. The hedging strategy ensures that their net fund value never goes below the original amount. You may consult a professional money manager to choose the right amount for each SIP.
Now that you know the top benefits of rupee cost averaging, it's time to know about the intricacies of this approach.
Problems With Rupee Cost Averaging
Despite many benefits, rupee cost averaging also contains a few downsides.
● The first problem with this approach is that your investment remains the same irrespective of the market's status. However, you can always top up your account with a lump sum amount when you feel the market will move in your favor.
● Another downside of this strategy is the exit load. Mutual fund houses generally levy an exit load on withdrawals within one, two, or three years from the investment date. Since you invest every month, at any time, you will have to pay the exit load for the previous twelve months' investment amount.
Rupee Cost Averaging is The Best Approach For All Investors
With the market becoming more volatile than before, rupee cost averaging is fast gaining ground. Jump on the bandwagon and start investing to welcome a financially secure future. If you ask why rupee cost averaging is the best approach for all the investors, it can be summed up through the following points:
● Rupee cost averaging allows investors to maximize the return on their assets.
● It allows an individual to balance out their investment costs by purchasing in both falling and rising markets.
● In times of collapsing markets, it provides the investor with additional units for the exact same money.
● Averaging rupee costs eliminates the need to monitor the market on a regular basis.
● Rupee cost averaging provides the benefit of steady investing, which aids in avoiding the hazards of market volatility.
● It is a strategy that gives improved opportunities for money growth that is suitable for all kinds of investors ranging from the beginners to the high-end investors.
Is SIP helpful in the Bull or Bear Market?
Rupee cost averaging in SIPs reduces market volatility, which increases total returns. This is why rupee cost averaging usually works the best in volatile markets, but it may also be effective in bull markets. This occurs when the price of a stock continues to climb over time. In such instances, analysts often advise investing in a bulk sum at the lowest available price. Even in such uptrends, though, frequent declines can occur, albeit on a very modest scale. As a result, you can invest tiny sums of money during such downturns. This will assist to reduce your overall costs. Even if prices rise tomorrow, your overall cost will be cheaper.
It mostly assists you in purchasing less when marketplaces are pricey and more when markets are cheap. Given the advantages of rupee cost averaging, an SIP is an easy method to do this.
According to experts, the notion of rupee-cost averaging is best suited for downturn markets. As prices decline, your average cost will decrease over time. This is why declining markets are regarded to offer a goldmine of chances.
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