Have you always heard Fin Gods in your circle saying it is next to impossible to time the market? Have they also told you that “Buy Low, Sell High” is the mantra that you should follow when you are investing in equities?
Well, you have a way to bypass this myth and build a large piggy bank for yourself despite the fluctuations in the market.
All you need to do is have some financial discipline and make sure that you invest a fixed amount on the same day every month without breaking the chain.
Rupee cost averaging
As the name suggests, you are averaging your costs and buying the mutual fund units accordingly. For instance, when the onion prices are hiked up to Rs 80/Kg, you cut down on your onion consumption and limit yourself to say 1 kg/month.
But when the prices are on the lower end, you would want to feast on various onion delicacies like pakodas, spicy sabzis and garnish every dish with onions.
Similarly, you would want to buy lesser units of mutual funds when the prices are high and more when the prices are low (since the markets are high/low, the underlying securities or stocks would be high/low ? Increased/decreased price of the mutual fund units invested in them).
As an investor, however, I would give into the market euphoria and buy when the markets are high and sell the units when the market has taken a downturn (in the hope to limit my losses).
As one can see in the above table, the average price that was in the market was Rs 52.14 and when one had invested in a SIP, the average price at which the units were purchased was Rs 44.93.
Averaging gives you the advantage of riding along with the market. A SIP could be considered one of the best strategies in market up as well as downturns.
| Invested lump sum in April itself | 7000 |
| Price/Unit | 50 |
| Number of Units | 140 |
| Investment value in March – 21* | 2800 |
| Alternatively, if invested in SIP as follows | |
| SIP Investment Value in March -21* | 4,818.15 |
Consider, an investor who invested in the market by deploying a lumpsum amount.
For example, in the following case, the investor buys the units in the month of March 20 (consider that the investor attempted to time the bottom, and the market was going down before the investment).
| Market Downturn | |||
| Amount | Price/Unit | Number of units | |
| Feb-20 | 500 | 50 | 10.00 |
| Mar-20 | 500 | 46 | 10.87 |
| Apr-20 | 500 | 45 | 11.11 |
| May-20 | 500 | 42 | 11.90 |
| Jun-20 | 500 | 40 | 12.50 |
| Jul-20 | 500 | 35 | 14.29 |
| Aug-20 | 500 | 32 | 15.63 |
| Sep-20 | 500 | 29 | 17.24 |
| Oct-20 | 500 | 25 | 20.00 |
| Nov-20 | 500 | 24 | 20.83 |
| Dec-20 | 500 | 22 | 22.73 |
| Jan-21 | 500 | 21 | 23.81 |
| Feb-21 | 500 | 20 | 25.00 |
| Mar-21 | 500 | 20 | 25.00 |
| Total | 7000 | 240.91 |
FAQs
What is Rupee Cost Averaging?
In the rupee cost averaging approach, an investor keeps investing a fixed amount of money at regular intervals irrespective of market behavior.
What is rupee cost averaging for example?
The rupee cost averaging approach allows an investor to buy more when the market is down and less when the market is high.
For instance, when the onion prices are hiked up to Rs 80/Kg, you cut down on your onion consumption and limit yourself to say 1 kg/month.
But when the prices are on the lower end, you would want to feast on various onion delicacies like pakodas, spicy sabzis and garnish every dish with onions.
What is the benefit of cost averaging?
Cost averaging is the way to spread out your investments over a period of time. It allows you to invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market.
You can get started on your investment journey with a SIP on the EduFund platform. You have all the top mutual funds in the country to choose from and a corpus to be made.
