RUPEE COST AVERAGING IN SIP



Investing in mutual funds through SIP is a relatively new and safe investment avenue. The main benefits of SIPs are:

·Power of compounding
·Affordability
·Less risk
·Saving habit
·Eliminates the need to time the market
·Rupee cost averaging

Among all these benefits, rupee cost averaging is the benefit which differentiates SIP from other investment avenues. Also, it is a pretty extensive area of study so having the basic knowledge of it can help you reap maximum benefits from your SIP.

WHAT IS RUPEE COST AVERAGING


If one invests regularly through a systematic investment plan for a fixed amount every month, one is able to buy more mutual fund units when the net asset value (NAV) is lower and fewer units when the NAV higher. This helps to lower the average purchase cost of units over longer periods of time as the market goes through multiple bull and bear phases. This is called rupee cost averaging which is one of the biggest advantages of SIP.

HOW RUPEE COST AVERAGING WORKS?

Age old wisdom dictates that you invest your money when the market is low so that you can earn returns when it starts rising. However, when markets are falling, many investors are tempted to wait for lower prices and they miss the opportunity as markets rebound. Then there are some who get emotionally or financially impacted by the downward market movement and aren’t motivated to invest more. The reality is that timing the market accurately is a difficult task which is rarely accomplished on a consistent basis. This is where rupee cost averaging comes to the rescue. This refers to investing fixed sums of money in an investment instrument (say an SIP), at different points of time and hence at different prices.

Following this process ends up meaning that over time, you buy more when markets are falling lower and you buy less when markets are rising and that is actually how systematic investment plans work. Consider you are investing Rs.2,000 each month through a SIP in equity mutual funds. In January with an investment of Rs.2,000 and at a NAV of Rs.20, you will be able to buy 100 equity mutual fund units. Since the amount of investment every month is fixed, when the market is low, you will be purchasing more units and when it is high, you will buy fewer units.

In the end, you will realize that you managed to buy the units at an average cost lower than the average market cost or average NAV (net asset value) of the units.

Instead of an SIP, if you had gone for a one-time lump sum investment, your average cost would have been higher and you would have bought lesser mutual fund units. Also, the value of your final investment would be more when investing in SIP. Best SIP plans can be more rewarding (especially in volatile times( than lump sum investing due to the effect of rupee cost averaging. You can thus avoid waiting for the best possible time for finding the lowest possible levels to invest in the market.

ADVANTAGES OF RUPEE COST AVERAGING

1.Rupee cost averaging benefits the investor in the long run by reducing the average cost of purchase.
2.Rupee cost benefit can be seen in full effect during a bearish market
3.You don’t have to wait for the right time to buy or sell the units.
4.It gives the investor an idea about what their investment will look like.

DISADVANTAGES OF RUPEE COST AVERAGING

1.Rupee cost averaging works only when buying units of a mutual fund. It doesn’t tell you when to sell.
2.If the units go only in the downward direction, rupee cost averaging will not bring any benefit to the investor.
3.Rupee cost averaging may also work inefficiently when the unit prices have a circular pattern.
4.If you buy and sell units quite frequently, then you might not be able to take full benefit of rupee cost averaging.

CONCLUSION

To summarize, rupee cost averaging implemented through a systematic investment plan over the long term enables you to manage market volatility in a simple and effective manner. Also, you can consult an advisor to know more on rupee cost averaging, online SIP and best SIP plans. Best SIP plans are truly small on savings and big on benefits.

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