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Understanding the ‘Rupee Cost Averaging’ concept


Rupee Cost averaging is a term often used by mutual fund agents and financial planners to explain the benefits of systematic investment plans of equity mutual funds or investing a small sum regularly in a disciplined manner.

Let us see how this actually works with a simple illustration.

Month Investment Amount NAV No. of Units

1

2000

10

200.00

2

2000

9.95

201.01

3

2000

9.73

205.55

4

2000

9.65

207.25

5

2000

9.5

210.53

6

2000

9.47

211.19

7

2000

10.05

199.00

8

2000

10.53

189.93

9

2000

10.21

195.89

10

2000

10.73

186.39

11

2000

11.07

180.67

12

2000

11.66

171.53

TOTAL

24000

 

2358.94

Mr. Gupta invests Rs 2000/- per month for a year in a systematic investment plan of a new equity mutual fund by a leading fund house. The NAV (Net Asset Value or price per unit) is Rs 10 at the time of entry.

During the year the markets fluctuate as a result of which the NAV falls a little below the entry price for the first 6 months and then recovers in the second half of the year. The NAV at the end of the one year period is 11.80.

Current value of Mr. Gupta’s investment = No. of units * current NAV = 2358.94*11.80 = Rs. 27835.50

Average NAV or sale price per unit over the 12 months = 10.21

Average cost per unit = 24000/2358.94 = Rs. 10.17

How this approach benefited Mr. Gupta –

Though the market fluctuated during the 12 month investment period, Mr. Gupta accumulated more units when the prices were low and less units when the prices were high due to which the average cost per unit is lesser than the sale price per unit resulting in a profit.

This is Rupee Cost Averaging. Mr. Gupta made the market fluctuation work for him by eliminating guesswork and the risk of timing the markets by following the disciplined approach of investing a fixed amount periodically.

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One response

  1. […] risk. All SIPs work on the rupee cost averaging concept. (Click on the link to know more – https://srirakshafp.com/2012/03/27/understanding-the-rupee-cost-averaging-concept/ ). An SIP with an investment amount of Rs 50 per month is also subject to the same volatility and […]

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