What is Rupee Cost Averaging and How it works ?

What is Rupee Cost Averaging ?

SIP's are now a days a well known investment tool for the new age investors. Especially the millennials are very keen to invest in Mutual Funds through Systematic Investment Plans(SIP) route. While investing in SIP we may have came across the term "Rupee Cost Averaging". What actually it means? It is something that benefits you when you invest in equity mutual fund schemes. As equity market is volatile in nature and high risk involved in it. Those first time and low risk investors don't have the required knowledge and expertise to track the market continuously can choose SIP route to invest in equity markets.

Concept - Rupee Cost Averaging

As equity market is volatile in nature and goes through ups and downs. Investing through SIP route in equity mutual fund schemes allows us to invest in regular intervals. That means buying units of mutual fund schemes in ups and downs of equity market, which average out our mutual fund units in long term is known as "Rupee Cost Averaging". In simple words while equity market is down you will get more units and when market is up you will get less units of mutual fund schemes, as you invest a fixed amount in regular intervals. 

How does Rupee Cost Averaging work?

Let us take an example, Hari invested Rs 2000 per month for one year in SIP. He will get units of mutual fund as shown below table.

Time          Amount Paid(Rupees)    Price per Unit          Number of Units Bought

Jan 2020         2,000                                  40                                   50

Feb 2020        2,000                                   42                                  47.61

Mar 2020        2,000                                  38                                  52.63 

April 2020      2,000                                   46                                  43.47

May 2020       2,000                                   41                                  48.78

Jun  2020        2,000                                   34                                  58.82

July 2020        2,000                                   30                                  66.66

Aug 2020        2,000                                   26                                  76.92

Sep 2020         2,000                                   39                                  51.28

Oct 2020         2,000                                   49                                  40.81

Nov 2020        2,000                                   55                                   36.36

Dec 2020         2,000                                   58                                   34.48     

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Total invested  = 24,000                                                             Total Units = 607.82    

Total invested amount is Rs 24000, Total number of units purchased 607.82, Average price per unit is Rs 39.48.

Rupee Cost Averaging

Market volatility is mitigated to some extend by investing through SIPs. As SIP allows us to invest in regular intervals in a disciplined manner, whether it is a bull market or a bear market. Through the concept of "rupee cost averaging" we can minimise our risk and maximise our returns in the long term. The concept "Rupee Cost Average" is more relevant for the investors who has a long term goal, it means long term investors can benefit out of it. So SIP is an easy way of doing this due to this benefit of "Rupee Cost Averaging". It is best suited for the investors who do not have time to monitor the stock market.

Conclusion

Rupee cost averaging is the concept of averaging out your investment in long term. Which is suitable for the investors who are new to equity market and has a disciplined approach of investing and don't want to take high risk. This concept is best suited for the investor's having a long term goal and has no time to track the market.

Happy investing.