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. The equity markets have always been volatile 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 tends to reduce the price of the commodity rises.
The fundamental principle of investing reinforces the same thing. It guides the investor to “buy-low and sell-high”. It means that you should buy more units of a mutual fund when the markets are down and fewer units 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, their average cost of investing increases and returns fall.
Benefits of SIP in Rupee Cost Averaging
An SIP investment allows you to take the advantage of rupee-cost averaging in an automated manner. For example, have a look at this table below
|TIME||Amount Paid||Price per share||Number of shares bought|
Total Investment: Rs. 24,000
Total number of shares bought: 637.32
Average price per share: Rs. 37.67
In an SIP investment, the factor of volatility is reduced and as a result, the overall gains will also increase.
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.
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