Mutual Funds - How does Rupee Cost Averaging in mutual fund SIP work?

The best strategy to invest is to buy when the markets are low and redeem when the markets are up. But how do you find out when the market hits its lowest or peaks in value? This is why the concept of Rupee Cost Averaging plays an important role. It saves you from huge uncertain losses due to wrong timing the market.

When you invest a fixed amount of money at regular intervals, without timing the market, you will end up investing at different level of prices. When the prices are up, you will get lesser number of units and when the market is down, you will accumulate higher number of units for the same amount.

In the long run, this will average out your cost of purchase hence lessens the results of short-term market fluctuation on your investments.

Illustration on how Rupee Cost Averaging works?

Lets understand the concept better with an illustration. Suppose you invest 10,000 every month via SIP in an equity mutual fund scheme. Equity markets being highly volatile, the Net Asset Value of your scheme will keep on changing. You will not be able to invest every month at the same NAV. If you started investing 10,000 in May, your SIP investment will look like:

6 month investment through SIP
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6 month investment through SIP

Rupee cost averaging works wonders in long term. It does not guarantee a profit, but with a sensible and long-term investment approach, it can smoothen the market ups and downs and reduce the risks of investing in volatile markets.

Source : Live Mint back