Rupee Cost Averaging (No Brainer Strategy)
Rupee cost averaging (RCA) is a concept that applies to Systematic Investment Plans (SIPs) offered by various mutual funds. As a strategy RCA helps you eliminate the need for deciding the right time to invest i.e. ‘time the market’ and as a result of this the average cost of a unit that you incur is always less than its average sale price, irrespective of the nature of the market (though by timing the market accurately you can make greater profits than those awarded by this scheme, but accurate timing is not everybody’s cup of tea!).
RCA can be explained as follows:
Assume that you have been investing Rs. 500/month for the last 3 months in the units of Aisapaisa SIP. The price has been falling over the mentioned period and hence you are able to buy more units each month –
|
Month |
Monthly Investment |
Price |
Units Bought |
|
January |
500 |
25 |
20 |
|
February |
500 |
20 |
25 |
|
March |
500 |
10 |
50 |
Your total investment has been Rs. 1500 and the average cost per unit incurred is Rs. 15.78 (1500/20+25+50), in case you were to invest the entire Rs. 1500 in one go you are most likely to invest at the simple average price i.e. Rs. 18.33 (25+20+10/3), which will always be greater. The same would happen in case the market was rising or fluctuating.
Hence, unless you are confident of your market timing, a SIP is the safest way to go.
Tags: Daily Funda
August 27th, 2008 at 4:29 pm
Any vehicle that falls above the Average Value line is a better value than a vehicle that fall below the “Average Value” line. Mutual Funds