As an investor, you can gain by moving steadily with regular investments rather than looking at high-speed sprints frequently in the market. If you invest modestly but regularly, you can make sure that even in the worst circumstances, there is a much low impact on your investments. Your financial status can then revive soon when the market picks up.
Ideally, you should purchase when the market is low and sell to earn profits when it moves north. However, you possibly cannot predict the highs and lows of the market accurately. Here come the advantages of rupee cost averaging in mutual funds to steer clear of uncertainties regarding the market.
How Rupee Cost Averaging in SIP Works In Mutual Funds?
Before addressing this question, let’s see how SIP works in a mutual fund. A systematic investment plan (SIP) lets you deposit a particular amount in a fund scheme at regular intervals. Therefore, when you invest through SIP, a fixed amount is transferred from your bank account to the investment scheme based on your chosen frequency.
SIP works hand-in-hand with rupee cost averaging to help you take advantage of the market highs and lows. As you invest a fixed amount monthly, the value of every unit gets averaged out. Rupee cost averaging, thereby, allows you to purchase more units when the market is low and fewer when it is high. This brings down the average cost per unit.
An Example of How Rupee Cost Averaging Works
Say, you invest ₹10,000 monthly through SIP in an equity fund. Since equity markets are quite volatile, the net asset value (NAV) of the scheme will continue changing. You can’t invest each month at the same NAV. If you began investing ₹10,000 in May, your systematic investment plan will appear like:
|Month||NAV||Number of Units (₹1,000 per NAV)|
Considering the figures above, the average purchase cost for the 6 months fell to ₹98.33 while you bought 613 units in all. However, if you had invested a lump sum in May, the price would have been more at ₹100. Also, you’d have purchased 600 units.
Advantages of Rupee Cost Averaging in Mutual Funds
In the long run, as your cost of purchase gets averaged out, it lowers the impact of short-term market fluctuations on your investments.
You can use rupee cost averaging in an automated way when you opt for SIP. Just request the bank to enable auto-debits from your account to pay the instalments for an investment scheme at the chosen regular intervals.
Disciplined regular investments
When you invest a fixed amount regularly, you build the habit of making regular savings to attain your financial goals. This is a disciplined approach towards investment.
Now that you see how SIP works in mutual funds with rupee cost averaging and how it can lead to long-term gains, consider investing in one right away and be unaffected by the market volatility!