Rupee Cost Averaging

'Rupee Cost Averaging' is a mechanism designed to eliminate the risk of timing the markets in an ill-informed manner, which can result in losses. As an investor, you are relieved of decision-making in terms of market entry and exit. All you do is, pay a fixed sum of money at regular intervals, across a pre-decided period of time.

The regular instalments ensure that you buy more fund units when the unit prices are low and less when the prices are higher. This way, you can tide over the volatility in prices over a long time period.

A sample illustration of the Rupee Cost Averaging Mechanism is given below:

Time
(in months)

Monthly instalment ( in Rs) Price per
share (in Rs)
Shares
purchased
1 5000 20 250
2 5000 21 240
3 5000 24 210
4 5000 19 265
5 5000 16 315
6 5000 17 295
7 5000 16 315
8 5000 23 215
9 5000 18 280
10 5000 22 225
Total 50000 19.6 2600


According to the table, had the investor invested Rs 50,000 in one installation, he would have bought 2500 shares at Rs 20 each. However, by investing only Rs 5000 per month, the investor benefits by obtaining 2600 shares at an average cost of Rs 19.6 per share.

Advantages of Rupee Cost Averaging

  1. Reduced average cost by exploiting market fall
  2. More number of shares for the same amount of money
  3. Affordable monthly installments
  4. Gradual investments that avoid the pitfalls of market fluctuations
  5. Rupee Cost Averaging and Insurance

A unit linked plan, based on rupee cost averaging, provides the dual benefits of obtaining an insurance cover along with creating wealth over a period of time.