Is it really possible to invest at a price lower than the market price? The answer is Yes, it is possible and that too in a perfectly legal way, by following the age-old principle of Rupee Cost Averaging.
Rupee Cost Averaging is a really useful concept in the science of investment. Let us try to understand it.
In this diverse world of investment, there are a few things which are common amongst all the investors. Every investor (including you and me):
- wants to buy more when the prices are low and less when the prices are high
- does not know when the prices are actually low and when they are actually high
Point no. 2 ensures that the point no. 1 is never achieved. Systematic Investment Plans (SIP) help solve this problem. Rupee Cost Averaging works in full force in an SIP.
In an SIP you commit a fixed sum of money to be invested periodically (monthly, quarterly, etc.). Hence, when the markets are volatile (as they are right now), you end up taking full advantage of rupee cost averaging. When the markets are low, you buy more units for the fixed amount and when the markets are high, you end up buying fewer units for the same fixed amount. This process ensures that the average cost of units is lower than what it would have been if you would have invested in lumpsum. This is what is called Rupee Cost Averaging.
Lets try to understand it with an example.
Suppose you have Rs. 10,000/- to invest. You have two ways to invest it. Either invest the entire amount in lumpsum or invest it in 10 equal installments of Rs. 1,000/- each.
If you invest in lumpsum and assuming the NAV of the scheme you are investing in is 20, you’ll be able to buy 500 units.
Alternatively, if you breakup your 10k in 10 installments, assuming a volatile market, your investments would be as under:
| Time (months) | Amount Invested (Rs.) | NAV (Rs.) | Units Purchased |
| 1 | 1000 | 20 | 50 |
| 2 | 1000 | 19 | 53 |
| 3 | 1000 | 24 | 42 |
| 4 | 1000 | 19 | 53 |
| 5 | 1000 | 16 | 63 |
| 6 | 1000 | 17 | 59 |
| 7 | 1000 | 16 | 63 |
| 8 | 1000 | 21 | 48 |
| 9 | 1000 | 18 | 56 |
| 10 | 1000 | 22 | 45 |
| Total | 10000 | 19.2 | 529 |
As you can see from the above table, your average cost is 19.2 and you end up buying 529 units as against 500 units when you invested in lumpsum. The additional 29 units is due to rupee cost averaging.
Though you have seen the benefit of rupee cost averaging, its important to note that rupee cost averaging has a positive impact only in a volatile market. If the market is going secularly upwards, you are better off investing in lumpsum.
