What is Rupee Cost Averaging Strategy in SIP? How does it Work?

We know that investing through SIP is a good way for women to become financially disciplined. Did you also know that, by investing periodically via SIP you can reduce the risk of market volatility? This happens through a process called rupee cost averaging in SIP. But, how does this work? And how can women employ this strategy to reduce their risk in the long term? Let’s find out in this blog.

What is Rupee Cost Averaging?

Rupee cost averaging is an investment strategy aiming at increased potential returns over the long term. It involves consistently investing through SIP when the markets are doing well as well as when the markets are falling. This approach allows an investor to buy more units in times when the market is falling and buy lesser units when it’s rising. Over time, your average cost of investment reduces.

How does it work?

Everything is simpler to understand with the help of an example! Take a look at the case of Reema and Seema to understand how rupee cost averaging works.

Investing through SIP

Reema is a disciplined SIP investor and she invests ₹ 1000 monthly. Given below are her investments and the no. of units purchased by her for 5 months –

MONTH	MONTHLY SIP	NAV OF FUND	NO. OF UNITS BOUGHT
Jan	₹1,000	₹100	10
Feb	₹1,000	₹94	10.64
March	₹1,000	₹91	10.99
April	₹1,000	₹96	10.42
May	₹1,000	₹110	9.09
	₹5,000		51.58

Investing through Lump sum

Seema has received a bonus at work and decides to invest ₹ 5000 via Lump sum. Given below is her investment and the no. of units purchased by her for 5 months

MONTH	Lump Sum	NAV OF FUND	NO. OF UNITS BOUGHT
Jan	₹5,000	₹100	50
Feb	–	₹94	–
March	–	₹91	–
April	–	₹96	–
May	–	₹110	–
	₹5,000		50

As we can see from the example above, Reema was able to purchase more units as compared to Seema in the same time period and as a result, her invested value was higher. Her average cost of investment was also lower than Seema’s. This is rupee cost averaging in SIP.

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Advantages of Rupee Cost Averaging

Protects against volatility

SIP helps women navigate market volatility without the need to time the market. By investing more during market lows and less during market highs, it allows them to take advantage of volatility in the market.

Lowers average cost

Investing through SIP consistently allows you to invest in different market timings. When markets are low, you can purchase more units and vice versa. Over time, this brings down the average cost of your investment.

Enables investment with small amount

Investing through SIP is a simple process that can be done with just Rs. 100. So, you can take advantage of the rupee cost averaging strategy even with a small investment amount.

Instills discipline

Regularly saving can be difficult in our hectic day-to-day lives. However, SIP makes this process easy by simply deducting a fixed sum consistently every month. This instills financial discipline in women and creates a long-term savings habit.

How to make use of cost averaging strategy?

The best way to make use of this strategy is to make periodic investments via SIP in Mutual Funds for the long term. It should be noted that this strategy is most effective for the long term as markets are unpredictable in the short term but in the long run fluctuations tend to balance out.

To sum up, SIP rupee cost averaging reduces the average cost of purchasing every unit of a mutual fund. It takes away the need to time the market and lets women benefit from market volatility.

Make monthly investments through SIP with LXME’s expert-curated portfolios and make use of rupee cost averaging strategy!

FAQ’s

Use LXME’s goal calculator to determine how much to invest to make your goal a reality! Simply, input your target amount and find out the required SIP or Lumpsum needed to reach your goal.

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