Understanding rupee-cost averaging

Some investors like to speculate on the right moment to invest. But predicting whether the market is going to move up, down or sideways is difficult even for professionals. With rupee-cost averaging you can opt out of the guessing game of trying to buy low and sell high.

With rupee-cost averaging, you invest a specific dollar amount at regular intervals regardless of the investment's share (unit) price. By investing on a regular schedule, you can take advantage of market dips without worrying about when they'll occur. Your money buys more shares when the price is low and fewer when the price is high, which can mean a lower average cost per share over time.

The most important element of rupee-cost averaging is commitment. How frequently you invest (monthly, quarterly or even annually) is less important than sticking to your investment schedule.

Does it work when prices are rising and falling?

The purpose of rupee-cost averaging is to take the guesswork out of investing by providing you with an average cost per share that's lower over the long term. Let's look at 2 examples to see what your average price per share would be when prices are rising and when prices are falling.

When unit price is rising. Rs.500 is invested in a mutual fund on the first of each month. The investor is this example would methodically acquire 109.89 units at an average cost of Rs.27.83 each. And there's no guesswork or worry about what the price is about to do.