What is Rupee Cost Averaging and How It Works

SIPs have been a popular term among the investor community, and so is ‘rupee cost averaging’. It is something that benefits you when you invest in equity instruments. As a first-time investor, you may lack the required knowledge or expertise to track the market continuously, and it is for this reason that you are advised to invest via the SIP route. We have covered the following in this article:

Concept – Rupee Cost Averaging

The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. Market volatility is part and parcel of equity investments, reflecting the ups and downs of the economy. If you recall the law of demand, it says that a higher quantity of a commodity is purchased when it is least expensive. Conversely, the demand reduces when the price of the commodity increases.

The fundamental principle of investing reinforces the same thing. It guides the investor to “buy-low and sell-high”. It means that you need to buy more units of a mutual fund when the markets are down and fewer when the markets are up. However, most of the investors end up doing just the opposite. They start buying when the markets are rising and suddenly redeem upon a slump. Ultimately, the average cost of investing increases and returns fall.

Benefits of SIP in Rupee Cost Averaging

Investment via SIPs in mutual funds will allow you to take advantage of rupee-cost averaging in an automated manner. Take a look at the following table to understand this concept better:  

Total Investment: Rs 24,000 Total number of shares bought: 637.32 Average price per share: Rs 37.67

Rupee Cost Averaging

By investing through SIPs, market volatility is mitigated to some extent, and as a result, the overall gains will increase. Rupee cost averaging works out best in choppy markets but is useful even when the markets are in a bull run. It mainly helps you buy less when the markets are expensive and buy more when the markets are cheap. A SIP is an easy way of doing this due to this benefit of rupee cost averaging.

Do you want to get the benefit of rupee cost averaging by starting your SIP investments in mutual funds? Then, head to ClearTax Invest where exciting opportunities lie ahead.

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