Rupee Cost Averaging
- Published Date: October 10, 2024
- Updated Date: June 17, 2025
- By Team Choice
The equity market entices investors with excellent returns at a higher risk. Retail investing has grown in India with online investment and brokerage platforms. The shareholding of domestic investors has reached an all-time high of 25.85%.
Investors often wonder whether reducing risk and getting better returns is possible. The truth is you don't need significant investment capital to start trading in the equity market. The rupee cost averaging (RCA) strategy enables you to buy more at lower and less at higher prices and still get better returns over the long term. This comprehensive guide highlights the impact of RAC on investments of any size.
What is Rupee Cost Averaging?
Rupee Cost Averaging (RCA) is a simple investment strategy that encourages you to make periodic, consistent investments regardless of the market condition. This approach helps you even out the purchase price of mutual fund units.
According to the law of demand, people buy more when something is less expensive and why less when the price increases. In the equity market, investors hope to time the market perfectly so that they buy at the lowest price and sell at the highest price.
Using the RCA strategy, instead of chasing market volatility and trying to time your purchase accurately, you can invest a fixed amount of money in one or more mutual fund schemes regularly, regardless of the net asset value (NAV).
Using this strategy, your account will be credited with more mutual fund units when the NAV is lower. Similarly, your account will be credited with fewer units when the NAV is higher.
The investment amount will remain the same during every period. You can choose to invest monthly, quarterly, or half-yearly based on your investment strategy. The RCA approach helps to overcome short-term volatility, generating rich returns in the long term.
A systematic investment plan (SIP) in mutual funds leverages the RCA strategy to enable any investor to earn better returns through their mutual fund investment. Your returns will be proportionate to your invested amount.
How Rupee Cost Averaging Works?
Let's understand the meaning of rupee cost averaging and its impact with an example.
Let's assume that an investor invests Rs. 5,000 per month for 6 months in SIP and another invests Rs. 30,000 as a lumpsum investment in the same mutual fund scheme. The RCA plays out in the following ways in different scenarios:
Scenario 1: Market Performing Well
SIP Investment (Rs. 5,000 per month for 6 months)
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Cumulative Units | Cumulative Investment (Rs) | Portfolio Value (Rs) |
|---|---|---|---|---|---|---|
| 1 | 5,000 | 50 | 100 | 100 | 5,000 | 5,000 |
| 2 | 5,000 | 52 | 96.15 | 196.15 | 10,000 | 10,200 |
| 3 | 5,000 | 55 | 90.91 | 287.06 | 15,000 | 15,788 |
| 4 | 5,000 | 58 | 86.21 | 373.27 | 20,000 | 21,650 |
| 5 | 5,000 | 60 | 83.33 | 456.6 | 25,000 | 27,396 |
| 6 | 5,000 | 65 | 76.92 | 533.52 | 30,000 | 34,679 |
Lump Sum Investment (Rs. 30,000 in the 1st Month)
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Portfolio Value (Rs) |
|---|---|---|---|---|
| 1 | 30,000 | 50 | 600 | 30,000 |
| 2 | - | 52 | 600 | 31,200 |
| 3 | - | 55 | 600 | 33,000 |
| 4 | - | 58 | 600 | 34,800 |
| 5 | - | 60 | 600 | 36,000 |
| 6 | - | 65 | 600 | 39,000 |
The SIP strategy performed well despite slightly lower growth due to RCA, which reduces risk.
Scenario 2: Market Not Performing Well
SIP
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Cumulative Units | Cumulative Investment (Rs) | Portfolio Value (Rs) |
|---|---|---|---|---|---|---|
| 1 | 5,000 | 50 | 100 | 100 | 5,000 | 5,000 |
| 2 | 5,000 | 48 | 104.17 | 204.17 | 10,000 | 9,800 |
| 3 | 5,000 | 45 | 111.11 | 315.28 | 15,000 | 14,188 |
| 4 | 5,000 | 42 | 119.05 | 434.33 | 20,000 | 18,623 |
| 5 | 5,000 | 40 | 125 | 559.33 | 25,000 | 22,373 |
| 6 | 5,000 | 38 | 131.58 | 690.91 | 30,000 | 26,295 |
Lumpsum Investment
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Portfolio Value (Rs) |
|---|---|---|---|---|
| 1 | 30,000 | 50 | 600 | 30,000 |
| 2 | - | 48 | 600 | 28,800 |
| 3 | - | 45 | 600 | 27,000 |
| 4 | - | 42 | 600 | 25,200 |
| 5 | - | 40 | 600 | 24,000 |
| 6 | - | 38 | 600 | 22,800 |
The SIP strategy clearly outperforms the lump sum in a declining market by purchasing more units when prices are lower.
Also Read: Sip Vs Lumpsum
Scenario 3: Market with Volatility
SIP
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Cumulative Units | Cumulative Investment (Rs) | Portfolio Value (Rs) |
|---|---|---|---|---|---|---|
| 1 | 5,000 | 50 | 100 | 100 | 5,000 | 5,000 |
| 2 | 5,000 | 52 | 96.15 | 196.15 | 10,000 | 10,200 |
| 3 | 5,000 | 48 | 104.17 | 300.32 | 15,000 | 14,415 |
| 4 | 5,000 | 45 | 111.11 | 411.43 | 20,000 | 18,514 |
| 5 | 5,000 | 50 | 100 | 511.43 | 25,000 | 25,571 |
| 6 | 5,000 | 55 | 90.91 | 602.34 | 30,000 | 33,129 |
Lumpsum
| Month | Investment (Rs) | NAV (Rs) | Units Purchased | Portfolio Value (Rs) |
|---|---|---|---|---|
| 1 | 30,000 | 50 | 600 | 30,000 |
| 2 | - | 52 | 600 | 31,200 |
| 3 | - | 48 | 600 | 28,800 |
| 4 | - | 45 | 600 | 27,000 |
| 5 | - | 50 | 600 | 30,000 |
| 6 | - | 55 | 600 | 33,000 |
Even in a volatile market with ups and downs, SIP outperforms the lump sum investment due to RCA, which allows purchasing more units during dips.
Across all scenarios, SIP benefits from rupee cost averaging, which helps to balance out the impact of market fluctuations and yields better results over time than a lump sum investment.
In reality, the equity market is highly volatile, and you can't expect an upward or downward trend extending for several months. With ups and downs, the RCA enables investors to benefit more by varying the number of mutual fund units based on price changes. This lets you capitalise on market volatility and override short-term fluctuations.
Benefits of Rupee Cost Averaging
Rupee cost averaging offers the following benefits:
- The investment expands when the average purchase price drops. With lumpsum investment, it is not possible to benefit from the average purchase price. RCA allows you to purchase more units when NAV is low priced, reducing the average cost of a unit.
- A highly volatile market can wipe out the capital of small investors. RCA strategy protects investors from high market volatility and provides some protection on the principal amount.
- Various SIPs can be started with just Rs. 500 per month. With a low investment amount and lower risk, there is a higher chance of earning returns over a few years. Investors will be more ready to invest a small amount periodically rather than risking a huge capital as a lump sum investment.
- Investors can also effectively hedge their investments using RCA. Investing one portion of the investment in equity SIP and another portion in debt SIP ensures that Net Future Value (NFE) doesn't fall below the actual amount.
Limitations of Rupee Cost Averaging
The RCA strategy has the following drawbacks:
- You must be disciplined throughout the investment horizon. Keeping your emotions away, you must invest the same amount of money regardless of the market conditions.
- The exit load of investment made using RCA may be higher at the time of withdrawal.
Is Rupee Cost Averaging Ideal for All Investors?
The goal of every investor is to make better returns during highly volatile market conditions. You can start small to overcome short-term volatility and look for long-term growth. Many investment platforms have rupee cost-averaging calculators to empower you to learn about your investment’s maturity potential.
RCA applies to investors in the following scenarios:
RCA unleashes its full potential in a highly volatile market such as the equity market.
- It is best suited for long-term investment.
- Ideal for investors who cannot monitor market movement regularly.
- Excellent for investors looking for a disciplined investment strategy
Conclusion
Rupee Cost Averaging (RCA) emerges as a strategic investment approach in a volatile equity market. It enables you to navigate market fluctuations by consistently investing a fixed amount, regardless of market conditions. This method is especially effective in a market characterised by frequent ups and downs, allowing you to lower the average cost per unit over time.
Looking for hassle-free investment to build wealth? Start your SIP today with Choice and take advantage of Rupee Cost Averaging for steady, long-term growth.
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