Could you imagine scoring a “gold mine” when the market is falling? Well, you’re in for a surprise!
It is common to swing between fear and greed during drastic market corrections/volatility, whether you’re a seasoned player or not. However, like most investors, you’re probably more anxious about buying the units at the “wrong” time.
Sure, you can try to time the market. But how can you figure out the market conditions correctly? Well, the truth is: you cannot. This is where Rupee Cost Averaging (RCA) can take away the guesswork for you.
What is Rupee Cost Averaging?
RCA is a systematic investment approach wherein you invest a fixed sum at regular intervals to purchase a particular instrument’s shares, say equity mutual funds, irrespective of the unit price or market condition. The age-old wisdom of “buying low” is actually at play here. During bearish runs, when funds have hit the lowest price points, you buy more units. And when bulls are dominating and prices are soaring, you buy fewer units.
As a result, you end up owning a fund unit at a much lower cost than the market average. It reduces the impact of market movements on your portfolio and brings down the overall investment risk. This is also how a Systematic Investment Plan (SIP) functions.
Case in point: say you started investing in equities every month via a SIP of Rs. 10,000. Here’s how your portfolio will pan out over the course of 10 months.
|Month||Amount Invested||Unit Price||Units Purchased|
|Total||30,000||40 (average cost)||916.66|
As you can see, your average cost per unit was Rs. 40 at the end of August when the market price was Rs. 60. Also, compare the final value of your investment, i.e., Rs. 54,999.6 (916.66*60) to your total investment of Rs. 30,000 – resulting in a profit of Rs. 25,000.
Other key advantages of RCA:
- Make the most of market dips
- Maximise profits over long-term
- Avoid impulsive decisions
- Doesn’t require frequent portfolio tracking
- Works as a hedge against falling markets
- Most importantly, peace of mind!
Additional Read: Financial mistakes to avoid in panic situations
How to get started?
While RCA is a wise investment strategy against market volatility, it also requires some forethought.
- Choose a sum of money you can comfortably invest on a regular basis: This amount should ideally align with your financial goals and return expectations over a specific investment horizon.
- Select the instrument you want to stay invested in for a long time: Invest in a fund you’re confident will only see bullish trends in the future. However, if the fund performance has been consistently poor, redeem the shares to cut your losses. Only then you can tide over the fluctuations in unit prices and maximise gains in the long haul.
Additional Read: Why are SIPs an Ideal Choice for the First-time Investor?
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