If you’re an investor, you must have come across the term “Rupee Cost Averaging”. But what is it exactly? How does this work in mutual funds? Well, we are here to tell you everything related to this term.
What is Rupee Cost Averaging?
Rupee Cost Averaging refers to the concept of averaging out the cost at which the units of a mutual fund are bought. In this case, the amount is invested regularly, due to which the investor gets to enjoy the benefit of investing across markets, including upmarket as well as downmarket. As far as mutual fund investments are concerned, the concept of Rupee Cost Averaging works well in systematic investment plans or SIPs.
Advantages of Rupee Cost Averaging
There are multiple benefits of rupee cost averaging in mutual funds. Some of them are listed below-
- You can generate maximum value for your investment in a highly volatile market.
- The concept of Rupee Cost Averaging eliminates the hassle of monitoring the stock market regularly.
- In case the market is moving downward, rupee cost averaging can be used for hedging.
- The concept is flexible in nature.
- Rupee Cost Averaging provides better opportunities to accumulate wealth.
How does Rupee Cost Averaging work?
If you’re investing the same amount in a scheme for a long time, at regular intervals, you get an idea of how the scheme works. Then, you would buy more units when the price is lower and buy fewer units if the price is higher. This will lead you to decrease the average cost per unit over a period of time. With a planned strategy and dedication to a long term approach, following this concept of Rupee Cost Averaging will help you smoothen out the ups and downs of the market along with reducing the risks associated with the volatility of markets. The Rupee Cost Averaging in SIP works quite well since a fixed amount is invested at regular intervals. Thus, it makes the average unit cost lesser than the average sales price for every unit, irrespective of the market fluctuations. In other words, the volatility of the market can be mitigated to an extent when investing through systematic investment plans, which leads to an increase in your overall gain. It increases the number of units when there is a bear market, whereas the value of investment increases during the period of the bear market.
Conclusion
Rupee Cost Averaging is an important tool if you wish to put your money in equity via mutual funds. The nature of the market never remains the same and is subjected to fluctuations. Thus, using the Rupee Cost Averaging concept will let you obtain disciplines investment and units at cheaper rates, making you increase your gains.
