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What is Rupee Cost Averaging?
The rupee cost averaging strategy involves investing a certain sum of money at regular intervals, regardless of whether the markets are moving up or down. Thus, you can increase your purchases during market downturns and reduce them during market peaks.
In the long run, this method will reduce your average cost per unit. We can depend less on luck when we use the arithmetic mean of purchases in the currency.
To put it another way, it helps the investor “buy-low and sell-high. It implies that you should increase your mutual fund purchases in times of market decline and decrease your purchases in times of market recovery.
Many investors, however, have the opposite outcome. They begin purchasing when prices are high and sell off quickly when the market falls. When investing, the average cost rises, and profits decrease.
Hence, rupee cost averaging is based on the idea that you should spread out the expense of buying units of a mutual fund. Equity investments are subject to market fluctuations since they track the fluctuations of the economy. The law of demand states that when a good or service is inexpensive, more of it will be purchased. When the price of an item rises, however, demand falls.
SIP in Rupee Cost Averaging:
The systematic investment plan (SIP) strategy for investing in mutual funds is based on rupee cost averaging. If you invest consistently, regardless of the state of the market, you may reduce the impact of the “timing” issue and increase your return on investment. A crucial fact to keep in mind is that rupee cost averaging is a sound method for the long haul.
A value-averaging SIP modifies the amount invested every month in order to maintain the value of your investment on a predictable path. This is in contrast to a typical SIP, which keeps the monthly investment amount unchanged. Rupee-cost averaging is a SIP in its simplest form.
For example, we invest Rs.1,000 per month total each month in a mutual fund, and when there is a correction, we increase our investment to Rs.1,250 per month so that we can take optimum benefit of the corrected market. And, if the stock market crashes, we invest Rs. 1,500 per month, so our total average reduces and we hold more units at a reduced cost. Thus, when the market rises, we will be at a huge profit.
When Does Rupee Cost Averaging Helpful?
Rupee Cost Averaging is a sub-set of SIP or Systematic Investment Plan. So, to understand RCA, we must first know what SIP stands for. In simple terms, SIP is Investing at constant intervals. Now, the following are the basis when RCA is helpful;
By its nature, the market is very volatile. RCA helps us to wave of volatility by investing in both the bull, bear & stagnant markets.
At its core, Rupee cost Averaging is all about investing for a longer term. Indirectly, the RCA methods help us stay invested for a longer haul.
The stock market is highly unpredictable. There is not a single individual in the entire history of investing who has gotten the market right in all their investments. We have some best investors, but even they are not good enough to tame the market. So, why fight the market when you can trade the trend?
When you know that you cannot tame the market. You play according to the game. I.e, a disciplined investment held for the long term, invested at every interval, and more.
Factors to know about RCA:
The most important step in Investing via Rupee Cost Averaging is that you invest in the right instrument. Invest in a well-researched asset such as a good performing Mutual Fund.
Hold tight is not just to invest and hold for the long term with no change in portfolio allocation. Infact, a constant semi-annual, annual tweak in the portfolio is suggested to trim the underperformers and allocate more towards the high achievers.
Investing consistently without worrying about market swings is possible because of the RCA advantage in SIP. But that doesn’t mean you shouldn’t take a look at your investments every once in a while.
If you want to make sure you’re on track toward your goals, you should regularly check in on your investment performance relative to relevant benchmarks, as well as your revised goals and level of comfort with risk.
Benefits of Rupee Cost Averaging?
In order to keep your investments on track with your financial objectives, you must exercise considerable self-control. With SIPs, you may choose a specific day of the month or quarter to automatically deduct money from your checking account and put it towards your investment.
You may avoid missing a payment by setting up automatic withdrawals from your bank to your SIP account. And, no matter what, never stop your SIP. Bull or bear, your SIP must stay.
Consistent SIP contributions over time can add up to a sizable retirement corpus. The compounding effect is another advantage of SIP that helps to increase the capital in addition to rupee cost averaging. SIP’s profits are reinvested, resulting in compound growth over time.
Since your investments are periodic (monthly or quarterly), you will get a different number of units at each allocation based on the unit price at the time. As a result, it will have a long-term cost-cutting effect. You won’t have to keep a close eye on the market every day thanks to this.
You can invest in mutual funds through either a lump sum payment or a systematic investment plan. Instead of putting all of your money into the market at once, systematic investment plans (SIPs) spread out your investments over a longer period of time.
One of the major advantages of rupee cost averaging is the ability to average out fluctuations in currency value. Using RCA via SIP can cut down on the cost of investing. This is especially helpful when investing in an equity mutual fund and dealing with more volatile markets.
The expenditures can be reduced by using RCA to stretch them out over a longer length of time. Not everyone has the foresight to anticipate market or NAV fluctuations, which is where RCA may help by allowing you to buy fewer units when the NAV is high and more when it is low.
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