Understanding Rupee Cost Averaging
Rupee Cost Averaging is an automatic risk-mitigation feature inherent in Systematic Investment Plans (SIPs). By investing a fixed sum regularly, you buy more units when market prices drop and fewer units when prices rise.
How it Works in Practice
Assume a monthly SIP of ₹5,000 over 3 months:
- Month 1: NAV = ₹50 → Units allotted = 100
- Month 2 (Market Crash): NAV = ₹25 → Units allotted = 200
- Month 3 (Recovery): NAV = ₹40 → Units allotted = 125
Total units accumulated = 425 units for ₹15,000 invested. Average purchase cost per unit = ₹35.29, which is significantly lower than the starting NAV of ₹50!
Key Takeaways
- Volatility is a friend to SIP investors, not an enemy.
- Never stop your SIP during market corrections—market dips are when maximum units are accumulated.