Investing in mutual funds through a systematic investment plan (SIP) is a popular and effective way to grow your wealth over the long term. One of the key benefits of an SIP is the rupee-cost averaging feature that comes with investing regularly in mutual funds.
What is rupee-cost averaging and how does it work?
The rupee-cost averaging feature is most commonly found in SIPs. With an SIP, you invest a fixed amount of money regularly, like every month. When you invest in an SIP, the fund manager will use the money you invest to buy units in the mutual fund. The number of units you receive will depend on the current market price of the mutual fund.
This approach allows investors to acquire more units when the market prices are low and fewer units when the prices are high.
For example, let’s say you invest Rs. 10,000 every month in an SIP for a mutual fund. If the market price of the mutual fund is Rs. 100 per unit in the first month, you will receive 100 units of the mutual fund. In the second month, if the market price of the mutual fund is Rs. 80 per unit, you will receive 125 units of the mutual fund. This means you will have more units of the mutual fund when the price is lower and fewer units when the price is higher.
Benefits of rupee-cost averaging in mutual fund investing
Low cost of investment
One of the key advantages of rupee-cost averaging is that it helps lower the average cost of investment through regular investments. When you invest a fixed amount at regular intervals through an SIP, you end up buying more units of the mutual fund when prices are low and fewer units when prices are high. This results in averaging out the cost of your investments over time and potentially resulting in better long-term returns.
Reduces the impact of market volatility
One of the most significant benefits of the rupee-cost averaging feature is that it helps reduce the impact of market volatility on your investment portfolio. Since you invest a fixed amount of money regularly, you buy units at different prices.
This means you are buying more units when the market is down and fewer units when the market is up. Over time, this can help smooth out the highs and lows of the market, reducing the impact of volatility on your investment portfolio.
Acts as a hedging tool
The rupee-cost averaging feature can act as a hedging tool by mitigating the impact of market volatility. By consistently investing a fixed amount at regular intervals, investors buy more units when prices are low and fewer units when prices are high. This helps to average out the purchase price, lowering the impact of short-term market fluctuations and potentially providing a hedge against sudden price changes.
To wrap up
Rupee-cost averaging helps in averaging out the risks associated with investing in mutual funds. By keeping these benefits in mind, you can achieve your financial goals in a systematic manner by investing in funds through the SIP route.