Rupee Cost Averaging Method – A better way to invest in volatile and unpredictable market conditions.



Volatile times in capital markets cause difficulty in effective investment decision making and timing the market is a challenging job.
Market participants always think to invest their money when market is low, so that they can earn returns when it starts rising. But predicting the market movement is uncertain and entering the stock market at the lowest possible levels is hardest.

When stock prices decline, investors should ideally be tempted to purchase their favourite shares. However, often, the temptation is accompanied by the expectation of further decline in prices, which makes investors wait longer. The prolonged wait usually results in indecision and by the time the markets rebound, the wait seems futile.

Way out to this difficulty – Rupee Cost Averaging Method.

Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high. By investing on a fixed schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments. This is one of the most reliable ways to gain from market volatility.

Benefits :

  • Works in line with the principle of buy LOW and sell HIGH.
  • Helps buy more units in a declining market and less when market is rising.
  • Investing same amount at regular intervals lowers the cost of purchase.
  • Eliminates the need to time the market.
  • Helps in reducing the Risk arising due to market volatility.

Let’s understand with two circumstances.

  • Scenario I : You started investing Rs.1,000/- per month for a year in Share X.

MonthInvestment Amount
(Rs.)
Assumed Price of X Share
(Rs.)
Quantities of Share X Bought
(Rs.)
Total Amount Invested
(Rs.)
JanRs. 1,000.00Rs. 100.0010Rs. 1,000.00
FebRs. 1,000.00Rs. 90.5011Rs. 2,000.00
MarRs. 1,000.00Rs. 105.0010Rs. 3,000.00
AprRs. 1,000.00Rs. 101.0010Rs. 4,000.00
MayRs. 1,000.00Rs. 125.008Rs. 5,000.00
JunRs. 1,000.00Rs. 80.0013Rs. 6,000.00
JulRs. 1,000.00Rs. 82.0012Rs. 7,000.00
AugRs. 1,000.00Rs. 103.0010Rs. 8,000.00
SepRs. 1,000.00Rs. 110.009Rs. 9,000.00
OctRs. 1,000.00Rs. 88.0011Rs. 10,000.00
NovRs. 1,000.00Rs. 92.0011Rs. 11,000.00
DecRs. 1,000.00Rs. 100.0010Rs. 12,000.00
   124 
Total quantity of shares bought = 124
Average Cost of Investment = Rs.96.77 per share
  • Scenario II : You invest Rs.12,000/- with one time lump sum investment in Share X.
MonthInvestment Amount
(Rs.)
Assumed Price of X Share
(Rs.)
Quantities of Share X Bought
(Rs.)
Total Amount Invested
(Rs.)
JanRs. 12,000.00Rs. 100.00120Rs. 12,000.00
FebRs. 90.50
MarRs. 105.00
AprRs. 101.00
MayRs. 125.00
JunRs. 80.00
JulRs. 82.00
AugRs. 103.00
SepRs. 110.00
OctRs. 88.00
NovRs. 92.00
DecRs. 100.00
   120 
Total quantity of shares bought = 120
Average Cost of Investment = Rs.100 per share


*Quantities bought in above tables are rounded off for better understanding.

From above scenario examination, it is evident that a regular fixed investment during volatile market is more rewarding than lump sum investment.

Summing up :
During volatile & unpredictable market conditions Rupee Cost Averaging along with financial discipline can help investor to lower cost of investment per unit. It also helps investor to avoid the trouble of waiting for the best possible time, or finding the lowest possible levels to invest in the markets.

However, this method can benefit in effective buying price of share, it increases probability of higher returns but doesn’t guarantee the same. Always consult your financial advisor before making any investment decisions.  

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