Rupee Cost Averaging - How it works?

RUPEE COST AVERAGING – HOW IT WORKS?

Do you ever know how you are getting benefits from SIP Investment? Although SIP/Mutual fund investments are dependent on the stock market. Why are people having more trust in SIP investments rather than a direct stock market investment? The answer is lying in the concept of Rupee Cost Averaging.

If you are starting investments for the first time, you are getting advice from an individual “start with SIP.” That happens because the people have built their trust in SIP from its past experiences. They get to benefit from the concept of Rupee Cost Averaging. In this article, you will learn how this concept will help you to increase your Net Worth or wealth over the period.

The Rupee Cost Averaging concept gives you the ultimate benefits when combined with the power of compounding and long-term investment.

There is a thumb rule in the stock market – invest for the long term. If you invest for the long term, you can make fortunes. – Deepak

In Rupee Cost Averaging, the investor invests their amount at regular intervals for the long term. While investing, it does not matter whether the stock market is high or low. It ensures that you buy mutual funds when the market is high & low.

At high levels, you buy lesser units of mutual fund & at a low level, buy more units of the mutual fund. In the long run, it always gives benefits with positive returns.

Let us understand this concept with an example. Suppose you are investing in SIP ₹2000/- per month for at least one year. So, your investment and returns would be like below:

Rupee Cost averaging Concept

In December, the total amount invested = 24000/-

Total units purchased = 186.65nos.

The final NAV = 140

Total value of your amount invested = Total units x NAV = 186.65 x 140 = 26131/-

Your return = (26131 – 24000)/24000 * 100 = 8.88%

SYSTEMATIC INVESTMENT PLAN (SIP) & RCA

We already know SIP is a kind of solution that is given by the mutual funds, for those people who do not want to invest money directly into the stock market. But this is true that the return you get from SIP is always less than the direct investment into the stock market. That happens because of Rupee Cost Averaging. Here, the name of this concept clarifies itself. The average in the name means the return that we got is just an average return.

SIP & RAC always work in the long term. If you invest your money in SIP & use the RCA concept but not follow this long-term rule, you will not get enough returns, or you may lose your money.

People often made a mistake by investing in SIP but not hold for a longer period and not able to get good returns. Let me explain you with an example. Before the process further, please follow the rule, long term investment.

Suppose you hold a mutual fund & its last 5-year price value is like the below chart.

Mutual Fund Chart

Now, you started investments from Jan-15 and leave after 1.5 years. You may lose money or book your penny profit only.

But if you hold till Dec.-19, you may get benefits; because the units that you purchased when the market down allowed you to enjoy the return.

Understand below Calculation:

Situation-1 When you leave after 1.5year.

Suppose you invested ₹1000/- per month till 1.5 years or 18months. Your investment and return would be like below:

Situation -1 Rupee Cost Averaging

Total Invested Amount = ₹ 18,000/-

Total Units Received = 1,722.8Nos.

Final NAV after 1.5Y = ₹ 8.2/-

Final Amount = 8.2 x 1,722.8 = ₹ 14,126.96/-

Total Return = (14,126.96 – 18,000)/18,000 = ₹ 3,873.04/-

Loss on Return = -21.5%

Situation-2 Now, when you continue your investment

when you continue your investment till dec.-19, your investment and returns would be like below:

After 5 Years - RCA

Total Invested Amount = ₹ 60,000/-

Total Units Received = 4,337.20Nos.

Final NAV after 1.5Y = ₹ 21/-

Final Amount = 21 x 4,337.20 = ₹ 91,081/-

Total Return = (91,081 – 60,000)/60,000 = ₹ 31,081/-

Profit on Return = 51.8%

That will clear how Rupee Cost Averaging works and how long-term investment gives you benefits.

STRATEGY FOR STARTING

  1. Start your investment by deciding the amount you may invest regularly.
  2. Select your fund & prepare your mind for the long term.
  3. Make sure your investment must be continuing at regular intervals. You should not be bothered whether the market is up or down.

There is a rule in the stock market you must book your profit when the market is up.

BENEFITS OF RUPEE COST AVERAGING

  1. The return you will get is more than the return you receive in FD or PPF.
  2. By investing regularly, you are at a lower risk.
  3. Stock market fluctuations do not disturb you.
  4. New investors use SIP and the concept of Rupee Cost Averaging to start creating their wealth.
  5. By using Rupee Cost Averaging, you need not worry about the market news and do no sit for analysis.
  6. Rupee Cost Averaging concept also uses indirect stock market investments. You can always buy on dips in the market.

CONCLUSION

If you are a newbie and have time constraints for analysis of the market then you must start with SIP investment. By investing, please make sure you are investing for a longer period. Whenever the market trend is upward & index at its peak, you must also book your profit. But never sell or take your money out when the market is down. Only then you get the benefit of Rupee Cost Averaging. In the last, I would only add, you should avoid debt-burdened companies using this concept.

HAPPY INVESTING….!!!!

3 thoughts on “RUPEE COST AVERAGING – HOW IT WORKS?”

  1. Pingback: Best Mutual Fund for Investment - How to Choose | The True Investment

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