Rupee Cost Averaging and SIP

By | March 18, 2012

The biggest advantage of mutual fund SIP is rupee cost averaging (RCA). While investing in stocks and mutual funds timing the purchase is very crucial. Ideally everyone would like to buy low and sell high. But it calls for you to be a demi-god to know when the stock is playing at its lowest and running at its highest. The best way for common investors to get returns like a pro is to do SIP. Investors do not need to time the market but simply reply on rupee cost averaging advantage of SIP.

Let’s see how rupee cost averaging works for SIP. We will take an example of an investor who would like to invest $1200 next year in mutual fund. He has two options in his hand, either he can buy units worth $1200 in one go or else opt for SIP of $100 each month. In this situation the investor can face two types of situations, one of a falling market and other of a rising market.

Rupee Cost Averaging (RCA) in Falling Market

One Time Buy

Because investor is confused due to falling market lets assume that he decided to buy stocks in the month of May when the unit NAV is roughly $22. In this case he would have bought 54.54 units.

SIP

Suppose during the start of the year NAV of mutual fund is as follows:

Month NAV Units (Nos)
Jan $30 3.33
Feb $28 3.57
Mar $26 3.85
Apr $24 4.16
May $22 4.54
Jun $20 5.00
Jul $18 5.55
Aug $16 6.25
Sep $14 7.14
Oct $12 8.33
Nov $10 10
Dec $8 12.5
74.22

Amount invested = $1200, Total Units purchased = 74.22, Average cost / unit = $16.168. In falling market case SIP is surely a winner.

Rupee Cost Averaging (RCA) in Rising Market

One Time Buy

Because investor is exited to investing seeing a very buoyant market but by the time he decides to enter and buy stocks the market has already started to rise. Let us suppose he enters in the month of Jul when the unit NAV is roughly $20. In this case he would have bought 60 units.

SIP

Suppose during the start of the year NAV of mutual fund is as follows:

Month NAV Units (Nos)
Jan $8 3.33
Feb $10 3.57
Mar $12 3.85
Apr $14 4.16
May $16 4.54
Jun $18 5.00
Jul $20 5.55
Aug $22 6.25
Sep $24 7.14
Oct $26 8.33
Nov $28 10
Dec $30 12.5
74.22

Amount invested = $1200, Total Units purchased = 74.22, Average cost / unit = $16.168. In rising market case SIP is again surely a winner.

Conclusion

The strategy of investing in equity through SIP is called as investing with rupee cost averaging (RCA) strategy also called as no-brainer strategy. Here investors need not worry about timing their entry in the market. Let it be whether the market is falling and rising, investing though SIP will make you outperform majority investors nd that too without giving any extra effort

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