A common term that you might have come across often while reading about mutual fund SIPs is ‘rupee cost averaging’. Whenever there is talk about investing through a systematic investment plan in an equity mutual fund, one of the benefits mentioned is rupee cost averaging. Let’s understand what this exactly means.
The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. The equity markets are volatile–some months they are up, some months they are down. Ideally, you should buy more units of a mutual fund when the markets are down and fewer when the markets are up. An SIP allows you to do that automatically.
For example, let’s suppose you have a monthly SIP of ₹10,000 in an equity mutual fund. When the markets are low, the fund’s NAV falls to ₹200 and you get 50 units of the fund. Next month, the markets rise and so does the fund’s NAV–to ₹500. This time, you get 20 units of the fund. Hence, over the two months, your average per unit cost comes ₹285. When you sell the units, you will get higher value for your investments as compared to buying all the units at a higher price. This is rupee cost averaging, which increases your gains.
Rupee cost averaging is something that seasoned investors do when they invest in stocks, but since lay investors don’t have the time, knowledge or expertise to do this on a continuous basis, they are recommended to invest via SIPs.
Rupee cost averaging works out best in choppy markets, but is useful even when the markets are in a bull run. It essentially helps you buy less when the markets are expensive and buy more when the markets are cheap. An SIP is an easy way of doing this thanks to the benefit of rupee cost averaging.