What is Rupee Cost Averaging?

When you drive around the city, sometimes you find an empty stretch and speed up to 80kmph while at other times you have to slow down to 20kmph due to traffic or a speed breaker. Finally, you end up clocking an average speed of say 45kmph or 55kmph depending on how often you had to slow down or speed up.

Just like the average speed of your drive through the city, that is neither too fast not too slow, investing in Mutual Funds through SIPs help to navigate the highs and lows of the market with ease. We all know, it is impossible to time the market. Hence an investor can never perfectly time the market highs/lows to buy/sell his or her investments. In such a scenario, a disciplined approach to investing can help investors achieve better control over the impact of market volatility.

When you invest a fixed amount in a Mutual Funds regularly on pre-defined dates every month over a long period of time, market volatility has less bearing on your investments. This is because you end up buying more units with the same amount when markets fall and buy fewer units with the same amount when markets rise. Thus, the average unit cost of the total units held by you tends to fall over time even if the market moves either way during this period. This is the essence of rupee cost averaging in SIPs.

If you continue with your SIP investment over a long period of time like five years or even longer, if the market has gained, the average cost of units tends to be lower than the prevailing NAV.

SIPs make rupee cost averaging benefits possible apart from offering the power of compounding. power of compounding becomes more effective over a longer holding period since your investments get more time to multiply further and help in building wealth without pinching your wallet too much.