3 Benefits of Rupee Cost Averaging
- 3 min0•
- 15 Mar 2023
The price of stocks changes every day and sometimes within moments during market hours. So, is it impossible to continuously track the prices? People investing in stocks without getting much time to track them may not always buy the stocks at lower prices. This is where rupee cost averaging comes in. With SIP investments, one can invest in stocks and enjoy the benefits of Rupee Cost Averaging.
What exactly is Rupee Cost Averaging?
RCA or Rupee Cost Averaging is a process where an investor invests an equal sum of money at specific periodic intervals irrespective of the per-unit share price. This process helps mitigate the risk of the time factor in investment and helps in investing in a volatile market. Let’s see how it works – Suppose you want to invest Rs. 5000 every month in XYZ company’s shares. Here’s how it can help you in your investment.
| Months | Amount invested | The unit price of shares (Rs.) | Number of shares bought |
|---|---|---|---|
15th January | Rs. 5,000 | 50 | 100 |
15th February | Rs. 5,000 | 46 | 108.7 |
15th March | Rs. 5,000 | 40 | 125 |
15th April | Rs. 5,000 | 45 | 111.11 |
15th June | Rs. 5,000 | 58 | 86.2 |
15th July | Rs. 5,000 | 60 | 83.3 |
Total | Rs 30,000 | Rs 49.83 | 614.31 units |
Observations
- The share price went down for the first three months, and then it went up for the last two months. This is why the number of units purchased in February, March, and April increased.
- Then in the last two months, June and July, the price went up, and thus the number of units purchased went down. This suggests that rupee cost averaging is beneficial when the market is an upswing.
- As the number of units you can purchase will be less than the same investment amount, the average cost can give you more units of shares.
- So, on the 15th of July, you have 614.31 units compared to 600 units of the same share that you would have bought if you invested the total Rs. 30000 on the 15th of January.
Top 3 Benefits of Rupee Cost Averaging:
- The first and foremost benefit that RCA brings in an investor is the discipline of investment. It is natural for investors to become impulsive in a volatile market and invest impulsively as well. With overall cost averaging and SIP investment, you can invest an amount of money at regular intervals without greatly getting affected by the volatility in the market. It also provides a sense of relief when the market is going up and you are investing.
- There is no need to track the market at all times to get the best rate for investing when you opt for RCA.
- If the market is in a bear phase that is going downward, then RCA can help in hedging as well.
So, with the method of investing you can develop a discipline within yourself for investing in the stocks and also avail different other benefits.
