Saturday, February 24, 2018

What is Rupee Cost Averaging

Mutual Funds
There are many investors who prefer to invest lump-sum amount into an asset class and forget about it until they need that money back. Also there are so many investors who are left with little savings and unable to invest in an asset class at one go. They rather invest a little but fixed sum regularly in assets over a long period of time to build corpus for their future needs. 

When one invests in any asset in one go he buys the asset at prevailing price at that point of time. He is not affected by the volatility in prices of asset as his buying price is fixed. But When one invests a fixed sum regularly he buys the same assets at different prices at different period of time (Systematic Investment Plan (SIP)).
In financial market there is always volatility. And because of this volatility the prices of assets change. Some times prices increases and some times prices fall. This is very tricky situation for an investor and s/he has to consider risk and return trade-off

An investor who keeps investing regularly is forced to buy the assets on the prevailing prices. Some time at higher price than the previous buy and some times at lower price. It may feel to him that he is making losses but when the whole investment and prices of the assets are taken into consideration, he would find that his average buying price is lower than that of the prices available at beginning for the lump-sum investment. This effect is termed as rupee cost averaging.

One keeps buying assets at different price even though her/his average buying price is lower than one time buying price. As it is the average price over a time period so this rupee costing average price is always lower than the highest buying price and higher than the lowest buying price.
This rupee cost averaging gives investor a positive effect on her/his nominal return. So it is beneficial.

No comments:

Post a Comment

What is an Equity Linked Savings Scheme (ELSS)?

There are different types of mutual fund schemes available in the market offered by different asset management companies. So as an investors...