Mutual funds are among the fast-growing investment options available in present times. With a plethora of investment avenues to choose from, one may find it difficult to invest a considerable portion of their savings in any one particular share. This is where mutual funds come in. Mutual funds are a pool of investments that invest the resources among diversified securities across the market.
In the mutual fund world, SIPs or systematic investment plans, are the most popular product as they are known for their untapped growth and diversification potential. But one thing attached to all these SIPs is the concept of Rupee Cost Averaging. Have you ever wondered what it is? Let us look at its meaning and understand why it is so important in the context of a systematic investment plan.
A person of ordinary prudence will prefer to buy units of mutual funds at lower costs but that cannot be the case always. The prices of such individual units fluctuate and, thus, at times, the units are purchased at higher prices. Averaging the purchase of units at higher and lower prices is termed as ‘Rupee Cost Averaging’. Investing in SIPs entails depositing a fixed amount at specified intervals, which can be biweekly, monthly, or even quarterly. Some also prefer to make lumpsum investments in mutual funds. However, there always lies a risk of getting the units at a higher price and, hence, Rupee Cost Averaging helps you spread your risk across the market movements.
Financial planners often advise you to stay invested for longer duration in SIPs to take advantage of Rupee Cost Averaging. It is best suited for investors who cannot monitor the volatility of the market and are committed towards their investments irrespective of the units they can buy with that amount. Let’s take a look at a hypothetical example explaining this.
|Date||Investment Amount||Unit Price||No of units bought|
|07th January, 2019||Rs5,000||Rs40||125.0000|
|07th April, 2019||Rs5,000||Rs37||135.1351|
|07th July, 2019||Rs5,000||Rs42||119.0476|
|07th October, 2019||Rs5,000||Rs39||128.2051|
|Total||Rs20,000||39.50 (Avg Price)||507.3878|
The table above shows how one benefits from staying invested with consistent amounts over a period of time. If the same amount was alternatively invested in April 2019, the investor would have been able to buy 541 units at a price of Rs40 each.
Rupee Cost Averaging helps hedge the fluctuations in the market. Moreover, it negates the efforts to track the market actively to manage your portfolio and offers flexibility in wealth creation. To conclude, Rupee Averaging Cost gives you an edge when you invest in SIPs for a longer duration to normalize the market fluctuations.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.