One SIP, Various Advantages – Rupee Cost Averaging

"Be fearful when others are greedy and greedy when others are fearful"
- Warren Buffet

Everyone tells us that the only way to make profits is to invest our money when the stock prices are low, so that they can earn returns when the prices start rising. Hence investing at the lowest possible levels is an instinctive wish of most investors. When stock prices decline, investors should ideally be tempted to purchase their favourite shares and mutual funds but often wait longer in the expectation of further decline in prices. The prolonged wait usually results in inaction and by the time the markets rebound, the wait seems futile. There are also a large number of investors who get emotionally impacted by falling markets and end up not wanting to invest at all as the fall in their invested value jolts them. Volatile times cause difficulty in effective investment decision making.

Timing the market accurately is a difficult task which is rarely accomplished on a consistent basis. However, the good thing is that one doesn’t need to have a crystal ball to earn profits. A little understanding about how markets can function, and a little more consistency could help you make money, more so during volatile times. Introducing Rupee Cost Averaging. This refers to investing fixed sums of money regularly in a particular mutual fund scheme at different points of time and hence, at different NAVs. What automatically ends up happening is that you buy more units at a lesser price and less units when the price goes higher. This results in the average cost of your investment per unit being lower than the average NAV per unit over time. This is one of the most reliable ways to gain from market volatility.

A great way to harness this strategy is through the Systematic Investment Plans (SIPs) facility offered by mutual funds. SIPs are a great way to reduce the average cost of your investment, which in turn, increases the scope of potential gains.

Consider the following example to understand the benefit of Rupee Cost Averaging vis-à-vis investing through SIP or a lump sum amount at a single point of time. Let us assume a SIP of ₹2000 for a year vis a vis a one-time investment of ₹24,000. The NAVs on the last working day of the months are as follows:

Case 1: Let’s assume an investment of ₹2,000 each month through a SIP in mutual fund scheme:

Case 2: Investing ₹24,000 with a one time, lump sum investment:

From the example above, it is evident that a systematic investment plan could be more rewarding in volatile times than lump sum investment due to the ability to generate higher returns by Rupee Cost Averaging- which lowers the average cost of investment per unit. One can thus avoid the trouble of waiting for the best possible time or finding the lowest possible levels to invest in the markets. The returns generated from staying invested during the long term can result in compounding gains. Besides inculcating financial discipline of regularly channelizing a fixed portion of funds towards investing for wealth creation in the long run, SIPs also do away with the need to time the market. Thus, irrespective of whether the market is in a bear or a bull phase, one is able to benefit from both situations and effectively manage the risk-return tradeoff.

To summarize, Rupee Cost Averaging implemented through a systematic investment plan enables to manage market volatility very effectively. However, it should not be taken as a guarantee to earn profits as all mutual fund investments are subject to market risk. To ensure that you gain the most from Rupee Cost Averaging and SIPs, one needs to invest continuously over the long term.

Other advantages of investing through SIP include

 Disciplined Investment: 
It helps one to save regularly and thus inculcates a sense of discipline

 Power of compounding: 
Small, regular investments lead to large accumulation of wealth over time hence harnessing the power of compounding.

 Small Pocket Investment: 
You can invest in a diversified portfolio of stocks with as low as ₹500 per month through the SIP mode.

Disclaimers:

CRAMC has used information that is publicly available, and information developed in-house. The information gathered and material used above is believed to be from reliable sources. CRAMC however does not warrant the accuracy, reasonableness and/or completeness of any such information. While utmost care has been exercised while preparing this, CRAMC does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the above. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor before taking any investment decision. The calculation shown, if any, are just examples and are only for illustration purposes, purely to explain the various concepts which are covered in the above. Please note the figures assumed above, if any, are purely for illustration purposes only & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.