Rupee Cost Averaging - Benefits & Points to Remember

Many investors think that the ideal time to invest in a stock or a mutual fund is when the market is at its lowest point so that they can buy more units for a given sum. Similarly, the best time to sell the units is when the prices of investments peak, offering a higher margin per unit.But looking at the volatility and unpredictable behaviour of the market, it is almost impossible to know the ideal buying and selling window for any mutual fund. In fact, seasoned investors strictly advise against timing the market.But then how can you take advantage of or tide through market volatilities if you don't time the market?This can be done through a Systematic Investment Plan (SIP) because of the benefit of Rupee Cost Averaging (RCA) it comes with.Let’s understand the RCA and how it benefits the investors.

When you regularly invest the same amount irrespective of the market situation, you buy stocks or mutual fund units in all the scenarios. However, since you're investing a fixed amount periodically, you buy more units when the investment value is low due to un-favourable market conditions and lesser units when it peaks.This leads to averaging of the cost of a unit, optimizing your return potential. This investment concept is referred to as the rupee cost averaging that forms the basis for SIP.The rupee cost averaging is beneficial for investors when –

• The investment is long-term.
• The investor is interested in fixed and disciplined investments.
• The investor cannot monitor the market changes regularly.

As can be seen historically, markets are always in a bear and bull run cycle. A bear phase is when the markets are going down, and a bull phase is when it's peaking. The key benefit of RCA is that it helps you take advantage of both the bear and the bull markets.Moreover, it allows investors not to worry about temporary market fluctuations while investing. This, in turn, helps investors in goal-based investing instead of trying to make a quick buck.

Let's understand the approach of SIP and how the rupee cost averaging works here through an example. Assume that Mr Amit Prakash invests a sum of Rs 2000 per quarter in SIP starting from January 2021 upto October 2021. The below table shows his quarterly investment and the number of units bought depending on the unit price, which fluctuates throughout the year.

As the table suggests, the total amount invested by Mr Amit in the year 2021 is Rs 8,000, for which he bought a total of 411.13 units. If he had chosen to invest Rs 8,000 as a lump sum amount in January itself, the total units would have been 400 with the price per unit of Rs 20.Due to fixed periodical investment, he was able to buy more units during July 2021 when the price crashed to 16 Rs. per unit, thereby accumulating more units by year-end. Simultaneously he bought only 90.90 units in October 2020l when the unit price peaked at 22. This helped him lower the average cost per unit to Rs 19.45.

Some of the benefits offered by SIPs through rupee cost averaging are:

• Wealth Accumulation With Small Regular Investments: With regular investment in SIP, you can accumulate a sizeable corpus in the long run. Apart from rupee cost averaging, compounding is another benefit of SIP that helps in boosting the corpus. The returns generated by SIP get reinvested, delivering compounded growth over the years.
• No Need to Track the Market For Temporary Volatility: Since you are investing every month or every quarter, you will be allocated a different number of units every time, depending upon the price as per the prevailing market conditions. Hence, it will lower the average cost in the long run. This frees you from the need to track the market daily.
• Disciplined Investment: It is extremely important to practice discipline in your investments to stay in line with your financial goals. For investing in SIPs, you can pick a fixed date for making the payment towards the SIP each month or each quarter. You can also get your bank account connected to your SIP account for an auto-debit to ensure that you do not miss any payment.

• Review your Portfolio Regularly: Yes, the RCA benefit in SIP allows you to invest regularly without worrying about market fluctuations. However, this doesn't mean that you shouldn't review your portfolio periodically. Make sure you review the performance of your investments against benchmarks, your updated goals and risk appetite to ensure you stay on track.
• Choose the Right Investment: When choosing a mutual fund, make sure you pick the right one that helps you enhance your portfolio and take you closer to your goals. SIP and the corresponding RCA benefit will help you once you've picked the investment of your choice, but you still have to choose the right investment.

As quoted by Warren Buffett, "We don't have to be smarter than the rest. We have to be more disciplined than the rest." It is a general perception that a bulk investment will give you better returns. But, in reality, the returns largely depend upon the discipline in investment and also its type and duration. So be disciplined and start an SIP in a mutual fund of your choice today. The RCA will take care of the rest.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.