Understand Rupee Cost Averaging in Stock Market: Wealth accumulation is an art. However, achieving this goal is not everyone’s cup of tea. This target can only be achieved by continuous learning. We bring to you one stock market concept that is “Rupee Cost Averaging.” Once you have mastered this art, financial independence can easily be achieved.
The concept of rupee cost averaging means averaging out the cost of acquisition at which investors have bought units of a mutual fund or stock. Investors know that the stock market is very volatile and it is impossible to time the market. Therefore, regular and disciplined investors tend to benefit from the concept of rupee cost averaging. Market volatility is mainly due to the ups and downs of the economy.
A fundamental or primary principle of investing is laid on one foundation- “Buy-low and sell-high”. It simply means that investors need to buy more stocks or units (in the case of a mutual fund) when the markets are down. Conversely, fewer or lesser units are to be bought when markets go up. Unfortunately, investors tend to do just the opposite. When they see the market rallying, they enter the stock and they start selling when markets fall. Ultimately, the average cost increases and returns tend to fall.
When Can Rupee Cost Averaging in Stock Market Be Beneficial?
The concept of rupee cost averaging is useful in many circumstances. Some of them are explained below:
- Rupee cost averaging is useful for those individuals who are left out of making investments due to the shortage of funds. This is because the investment amount gets divided and a small proportion gets invested periodically. Investment is made at regular intervals.
- The benefits of this concept are realized when investors wish to build a significant corpus and want to invest some money for a future date. Rupee cost averaging is beneficial over the long term. Therefore, investors who invest considering a particular goal can capitalize on this investment strategy by investing a fixed sum in a disciplined manner.
- Making investments by following the principle of rupee cost averaging in stock market can help in mitigating market volatility to some extent.
- When an investor decides to invest a specific amount in a particular stock of his/her particular portfolio on a continuous basis, he/she can benefit from the concept of rupee cost averaging. For example, if an investor is very confident about the growth potential of a particular stock, he can apply this concept. When the markets are correct, he can add some more shares of that company. This will eventually bring down the average cost of purchase.
- Because of the fixed schedule, an investor is free from the task of exploring the right time to invest. It helps in minimizing the guesswork.
- Even though this strategy does not guarantee profits, it is an effective and successful way of wealth creation over the long run.
- Since an investor is aware of the monthly commitments, he/she can make investment decisions wisely.
Rupee Cost Averaging in Mutual Funds
At the time of investing in mutual fund schemes, investors are given an option to choose one of the two modes of investment- Lump sum or SIP. Lumpsum mode means investing all the money in one go. SIP, on the other hand, means breaking down the investment amount into small chunks and then investing systematically over a selected time period. Simply put, a Systematic Investment Plan (SIP) means a facility offered by mutual fund companies to investors in which investments can be made in a disciplined manner.
Rupee cost averaging is one of the main benefits of making investments through the SIP mode. This is particularly true for investors investing in an equity mutual fund. This is because these mutual fund schemes have higher market volatility.
When investors opt for making investments through SIPs, they tend to automatically benefit from rupee cost averaging. This is because of the periodic investment in a particular fund. By this, investors can accumulate units at different prices (NAV). Therefore, when the market falls, more units get purchased with the same amount. This helps in improving the average cost of purchasing the mutual fund.
Some people argue that SIPs are a psychological tool of discipline. They are correct! By their nature, investors get excited when the equity markets go up and they invest all of their capital in one go. Therefore, when markets fall, they are left with nothing but disappointment. SIPs help in automating the entire investment process. This strategy helps in delinking sentiment from investing. Therefore, investors can benefit from rupee cost averaging and achieve healthy returns.
Quick Read: Mutual Fund Investing Course For Beginners
Rupee Cost Averaging in Stock Market
This concept is also applicable to stocks. When an investor purchases a stock, he bets on the company’s future performance and current financial position. What if the market falls? Will it impact the financial position or core fundamentals of that particular company? The answer is no! The fall in the market was possibly due to the market sentiments. During this time, investors can purchase more shares as the fall in the stock price was merely due to the market sentiments. This process can be automated in such a way that the shares get purchased on a periodic basis automatically. By doing so, the investor needn’t be worried about timing the market. He/she can ignore the short-term fluctuations.
By their very nature, equity markets are very volatile and unpredictable. This is why it is always advisable to spread the investments over a period of time. By following this, investors can benefit from the lows which occur on a regular basis.
Rupee cost averaging in stock market helps in creating both financial discipline and psychological discipline. Since the entire process is automated, the chances of speculations are reduced to a great extent.
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