The Power of Rupee Cost Averaging in Mutual Funds

Investing in Mutual Funds is generally considered a popular way for individuals to build wealth over time. One strategy that has gained significant attention and importance in the world of Mutual Funds is "Rupee Cost Averaging." Let us understand what rupee cost averaging is, why it's important, and how it could potentially benefit investors in the long run.

Understanding Rupee Cost Averaging:

Rupee Cost Averaging (RCA) is an investment technique where an individual invests a fixed amount of money at regular intervals, regardless of the market's ups and down. In simple terms, it is a Systematic Investment Plan (SIP) which has the potential to help investors build wealth. In this process one buys more units of a mutual fund when prices are low and fewer units when prices are high. Over time, this strategy aims to reduce the impact of market volatility on overall investment.

The following example explains this concept more clearly.

Let's take an example. Priya invests a fixed amount of Rs 1,000 on the tenth of each month with a SIP in a mutual fund scheme. Let’s see what happens in both the scenarios, if the market goes higher or falls. Let’s say she started investing in April of a particular year and the market went up for 8 months.
 

The average cost of buying each unit in this case comes at a much lower Rs 21.16 (total amount invested/total units accumulated). Similarly, if we assume that the markets fall during the 8 months, the average cost of each unit would come to Rs 20.05 (see the table below).
 

In the second (market falling) scenario, if Priya would have invested Rs 8,000 as lump sum in April itself at a NAV of Rs 27, then she would have got 296.29 units. These units by the end of 7 months would have brought down Priya's investment value to just Rs 4,444.35 (296.29 units multiplied by price of each unit in November, i.e. Rs 15).

Comparing this to 398.98 units accumulated using the rupee cost averaging approach, her investment value in this case would be Rs 5,984.7. One can clearly see the difference rupee cost averaging has made in cutting losses in Priya's investment.

The above is for illustration purpose only with assumed price of units taking into account various market factors and is shown only for understanding purpose. The same should not be construed as returns that the investors may receive. It does not guarantee, assure, promise or indicate any returns.

Importance of Rupee Cost Averaging (RCA):

1. Mitigating Market Volatility:

   The primary benefit of RCA is its ability to mitigate the impact of market volatility. When one invests a fixed amount at regular intervals, one automatically buys more units when prices are low and fewer units when prices are high. This reduces the risk of making significant investments at the wrong time, such as during market peaks.

2. Disciplined Investing:

   RCA brings discipline in investment approach. It encourages one to stay invested over the long term, regardless of market fluctuations. This long-term perspective can be helpful for accumulating wealth steadily and achieving financial goals.

3. Emotional Control:

   Investing can be emotionally taxing, especially during market downturns. RCA removes the need for emotional decision-making. You invest systematically, regardless of whether the market is bullish or bearish, which can help you avoid impulsive decisions driven by fear or greed. This approach brings in automation when investing and helps the investor reduce the guessing game to time the market.

4. Potential for Lower Average Cost:

   By consistently investing a fixed amount, one automatically buys more units when prices are low. Over time, this lowers average cost per unit. This means that even if the market experiences fluctuations, investor will benefit when the market eventually rises. Especially when markets are in a bear grip, investors gather more units and in a bull market investor gather less which helps investor average out their total cost of buying units.

5. Magic of compounding with SIP (RCA):

   Rupee cost averaging is generally considered ideal for long-term wealth accumulation goals, such as retirement planning or saving for your child's education. Over an extended period, the power of compounding, coupled with disciplined investing, has the potential to grow your investments.

Conclusion:

Rupee Cost Averaging is considered as a simple yet a good strategy for mutual fund investors. SIP investing uses the rupee cost averaging approach. It has the ability to mitigate the impact of market volatility, promotes disciplined investing, and aims to allow investor to benefit from the power of compounding over the long term. By embracing RCA, one can navigate the ups and downs of the market with confidence and which would help work toward achieving one’s financial goals and make every SIP count. Remember, consistency and patience are key when it comes to rupee cost averaging, as it's a strategy designed for the long haul.

The information contained in this document is for general purposes only and not an investment advice. HDFC Mutual Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.