What is rupee cost averaging?

As an investor, your goal is to buy stocks at the lowest price and sell at the highest. However you can never be certain that the price you are paying is the lowest as there are chances it could go lower in the future.

Trying to time your investments such that you get the best price is called speculation and the fallout of this is that you may never land up investing since you are waiting for the right price to arrive.

Instead, by investing on a regular basis, throughout the year, investors can average out the cost of their investment. This is known as Rupee Cost Averaging and is the basis of the Systematic Investment Plan (SIP).

For illustration purposes, let’s assume Investor A invests 10,000 per month in a mutual fund using an SIP.

No. of SIPs Month NAV No. of Units (Amt./NAV)
1 August 100 100
2 September 101 99
3 October 95 105
4 November 80 125
5 December 98 102
Total 474 531

As such the average cost per unit works out to 94.8 instead of Rs. 100. Investing via an SIP helps an investor get the best rate for their investments rather than trying to time the market. If Investor A had invested Rs. 50,000 in the first month itself in a lumpsum, the cost per unit would be Rs. 100 and he would have accumulated 500 units only.

In the illustration above, the difference in the NAV across 5 months is small but over years, the price value will vary significantly and make a considerable difference to the average cost of your investment

Rupee-cost averaging is a long-term strategy and is a good strategy to overcome the need to speculate or time the market.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.