Many investors have come to realize that Rupee Cost Averaging can serve as a shield against market fluctuations. In a world of economic uncertainty, the protection of wealth has emerged as a priority for everyone.
Among numerous investment avenues, mutual funds have risen as a popular choice, offering a path to wealth creation. Let us examine how this can enhance your financial journey, ensuring the safeguarding of your hard-earned wealth.
What is the Rupee Cost Averaging in SIP?
The idea of Rupee Cost Averaging is averaging out the cost at which you buy units of a mutual fund through a Systematic Investment Plan. This principle is working automatically when you buy mutual fund units through SIP.
You can invest a fixed amount of money at regular intervals regardless of how the market is performing at that particular moment. This helps to even out the average price you pay for the units of a mutual fund.
How does Rupee Cost Averaging work?
Imagine you have a total investment amount of Rs. 10,000 and you want to invest in a particular mutual fund unit. Instead of investing the entire amount at once, you decide to use Rupee Cost Averaging and invest the amount over five months.
Month 1 – You invest Rs. 2,000, and the price is Rs.100 per unit. So, you purchase 20 units in the first month.
Month 2 – You invest another Rs. 2,000, but the price has dropped to Rs. 80 per unit. With the same amount, you can now buy 25 units.
Month 3- You invest Rs. 2,000 in the third month and the price has decreased to Rs.70 per unit. So you can buy approximately 28 units.
Month 4- Again you invest Rs. 2,000 and the price has slightly increased to Rs. 75 per unit. With the same amount, you purchase approximately 26 units.
Month 5- You invest the remaining Rs. 2,000 and the price has gone up to Rs. 90 per unit. So, now you purchase only 22 units.
At the end of the five months, you would have invested a total of Rs. 10,000 and accumulated a total of 121 units.
Now, let us compare this with the scenario where you invested the entire Rs. 10,000 at once in the first month when the price was Rs. 100 per unit. In that case, you would have purchased 100 units.
If the price at the end of the five months is Rs. 85 per unit, here is how the total investment value would compare.
In Rupee Cost Averaging,
Total units: 121
Total investment value: 121 units x 85 = Rs. 10,285
In Lump Sum Investment,
Total units: 100
Total investment value: 100 units x 85 = Rs.8,500
By using Rupee Cost Averaging, your total investment value will be higher compared to a lump sum investment.
How does averaging protect your wealth?
Reduces market timing risk
Investing in the market can be tricky, even for experienced investors. Trying to predict when it is the best time to invest is difficult. That is where Rupee Cost Averaging comes in.
This approach prevents you from making bad investment decisions. Because you are investing a fixed amount of money at regular intervals regardless of whether the market is up or down.
By doing this consistently over time, you can smooth out the impact of market fluctuations on your investments.
This means you don’t have to worry about the “right” time to invest. Instead, you focus on steady investment over the long term.
Smoothing out market fluctuations
Investing at regular intervals will help you to lessen the impact of market fluctuations.
When prices are high, the fixed amount you invest buys a smaller number of units. On the other hand, when prices are low, you can acquire more units. Consequently, the increased number of units will bring you higher returns.
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This averaging effect works to reduce the impact of market fluctuations on your returns. Therefore you can reduce the risks associated with sudden price changes.
Disciplined approach to investing
Rupee Cost Averaging encourages a disciplined approach to investing. Your investment decisions will not be influenced by market fluctuations. Instead, you will get a long-term investment perspective.
Rupee Cost Averaging helps you to achieve your long-term financial goals with more ease. So embrace the power of Rupee Cost Averaging and let it guide you on a path toward financial abundance.
