Rupee cost averaging in the heart of mutual funds SIP. As we are on the constant lookout for making profit from wherever it’s possible. It is the most basic nature that a human being possesses. Especially when we are spending money, we want to make the best use out of it. While making an investment, we are always looking for any opportunity to minimize the risks and generate more returns out of it. However, there’s only so much you can do.
There are various ways to invest money in order to get better returns. But, a smart investor can generate good profits from his already invested money in the market. He just needs to apply the concept of rupee cost averaging.
Rupee cost averaging refers to taking benefit of the volatility of market to make profit. To make it to their best use, the investors should buy more of securities when the market is down and lesser when the market is up and about. Similarly, they should sell more securities when the market is rising and try to sell none when it is down. This phenomenon creates a price difference which actually creates a profit for the investors.
Many investors, however, do quite the opposite of this concept. The reason is that they feel that since the share prices are rising, that particular company is doing well in the market and so it’s beneficial to purchase stock of that company. On the contrary, you don’t know as to for how long will the company continue doing well in the market and so, there are risks involved. However, with rupee cost averaging, the risk factor is minimized and one can enjoy the benefits of a volatile market situation.
Let’s understand this with an example. Say, a person bought 200 shares at Rs. 150 each. Due to fluctuations in the market situation, the price of the shares rose to Rs. 170 and he decided to sell 25% of his shares. He made a profit of Rs. 1000 on the sale price. After some more time, the share prices goes down to Rs. 130. If the person sells his share now, then he’ll incur losses only.
This is how the law of demand works in the normal market situation too. The higher the price, the lesser is the demand. The lesser the price, the higher is the demand.
In the long term too, one can make use of rupee cost averaging. It is used in SIPs too. The investment to be made is fixed and so is the periodic interval at which it is made. However, the price of the shares and the units bought differs with the market fluctuations. Due to this, the cost per unit of share bought lessens in the long run and helps us with better returns in lesser investment.
Rupee cost averaging is a technique that smart investors follow in order to get the right value out of their money. This is one of those few technique that an investor must be aware of in order to make the best out of their investments in the long run as quite many of the investment products make use of these small concepts to help you create more wealth.