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What Is Rupee Cost Averaging? How Does It Help In Building Your Corpus?

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.

What Is 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). Instead of actively pursuing a strategy and implementing the mantra, I could follow another mantra where I invest in the SIP route of a mutual fund from a dedicate % of my salary. This way, I need not time the bottom of the market to buy into the markets. Don’t believe us? Look at the example as follows –

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. An SIP could be considered as 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 into the market by deploying a lumpsum amount. For example, in the following case, the investor buys the units in the month of Mar-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 

You can get started on your investment journey with an SIP on the EduFund platform. You have all the top mutual funds in the country to choose from and a corpus to be made.

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