What Is Rupee Cost Averaging? Should You Opt For It?

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The very best analyst in the world cannot predict the movement of the stock markets. Many would give you lot of gyan, but he fact remains that it's almost impossible to predict the movement of the market.

The only best thing that analysts tell investors to do is to invest through the Systematic Investment Plan, because it gives you an opportunity to average your costs, since you cannot predict market movements. This is also called rupee cost averaging as it enables an average, instead of buying at a high rate and then selling at a low rate or vice versa.

What Is Rupee Cost Averaging? Should You Opt For It?
You can either do a rupee cost averaging for mutual fund units or shares or both.

Lets give you some example of how rupee cost averaging works in the context of mutual fund units.

Month Amount Invested Mutual Fund Price No of Units
Jan Rs 1000 25 40
Feb

Rs 1000

25.5 39.21
March Rs 1000 26 38.46
April Rs 1000 24.5 40.82
May Rs 1000 23.9 41.84
June Rs 1000 25.5 39.21
July Rs 1000 26.6 38.17
Aug Rs 1000 25 40

As can be seen from the above illustration that by buying the units every month irrespective of the price, the unit holder is able to average out his cost. This is because he not sure which way the market would go and hence buys every month. The month he has bought low helps him, while if he has bought higher, it helps the averaging of the costs when he has bought at lower levels.

This is how a systematic investment plan also works.

Should You Buy Through Rupee Cost Averaging?

This mechanism is suitable for those who wish to invest in the stock markets or mutual fund units every month, to enable them to build a portfolio. It's not always necessary that you would make money. For example, if you have bought for one year when the markets are high, as is the case now, you would end-up losing money should the markets really crash.

However, it would also give you an opportunity to buy further should the markets crash. What you need is to stay the course and not sell your units when the markets have crashed and in fact keep buying to average the costs.

The trick as mentioned is to invest systematically though either a Systematic Investment Plan or to keep buying into good quality shares irrespective of where they are headed.

Conclusion

If you want to invest at regular intervals go through a plan like Systematic Investment Plan which helps in rupee cost averaging. There are many mutual fund schemes that permit investment through this mechanism.

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Read more about: sip, systematic investment plan
Story first published: Thursday, March 12, 2015, 10:58 [IST]
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