Systematic Investment Plan-Rupee Cost Averaging

For any investor, an ideal situation is to purchase assets units on lowest value (entry into market) and sell them on highest (exit from market) in a specified period and realize maximum profit. But in a volatile market like today, it seems next to impossible to judge the movement of prices and thus decision on investing. To overcome this problem of judgment and help investors, analyst came up with a technique known as RUPEE COST AVERAGING.

Let’s start by understanding the concept of Rupee Cost Averaging. It is an investing technique wherein regular amount of money are invested over a period of time such that more asset units can be purchased in bearish market (when market is falling) and less in bullish market (when market is rising), possibly reducing the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. This method thereby eliminates the need to time the market (i.e. making an entry or an exit) an area where most investors are prone to go wrong.

Systematic Investment Plan works on the same principle of Rupee Cost Averaging and is thus specifically popular among average investors who hold small amount of money at any given time and support regular investing rather than one-time investment. By investing on a regular schedule, investors can not only take advantage of market dips without worrying about when they'll occur but can also develop a sense of regular savings.

To further understand the concept and advantages of Rupee Cost Averaging; let’s consider an example where investor intends to invest Rs.48000 p.a. in two ways and analysis the outcome:

1. One time Investment
   Under this option, Investor chose to invest the entire amount of Rs 48000 at the start of year at the market price as below

   ProStocks with closest competitors

   Date	Amount to be invested	Market price per share	No of shares
   Jan 2018	48000	50	960

2. Monthly Investment using SIP

   Under this option, Investor chose to invest Rs 48000 in 12 equal monthly installments as below:

   Date	Amount to be invested	Market Price Per share	No of shares
   Jan 2018	4000	50	80
   Feb 2018	4000	52	77
   March 2018	4000	49	82
   April 2018	4000	44	91
   May 2018	4000	50	80
   June 2018	4000	46	87
   July 2018	4000	48	83
   August 2018	4000	50	80
   September 2018	4000	51	78
   October 2018	4000	45	89
   November 2018	4000	52	77
   December 2018	4000	54	74
   Total	48000	49	978

Conclusion:

We can conclude the result from the above analysis as below:

.	One time Investment	Monthly Investment
Total No. of units	960	978 (More Units)
Average Cost per unit	50	49 (Less Cost)
Sale Price (At end of Year)	54	54
Amount to be realized	51,840	52812
Gain (Sale Price-Cost Price)	3840	4812
Benefit		972 (More profit)

It can clearly be observed that in case of the volatile market, where price keeps on moving upwards and downwards, monthly investment not only increases the holding of the investor but also reduces his per unit cost by averaging the cost of all holdings acquired during a certain period. More units and less cost means the investor will realize more gains at the time of sale as illustrated in above table by an additional gain of Rs 972 in case of monthly investment achieved because of the benefit of rupee cost averaging.

For an investor, an ideal situation would be to purchase the entire units at the lowest market value i.e. at Rs 44 in April 2018 (in the example illustrated above) and maximize return. But it’s almost impossible to predict the market movement and wait for the perfect time when the price hits the lowest point. So, for an average investor, Rupee Cost Averaging technique as used in Systematic Investment Plan is the like a boon to maximize return instead of market fluctuations.