What is Rupee Cost Averaging ?
- 2 March 2017 | 479 Views | By Mint2Save
At the time when Online Trading it was introduced, investment companies spared no effort in making it look like a really simple video game. With several print and audio-visual commercials, people were made to believe that anybody can in the stock market, provided he uses online trading.
Soon enough, this misnomer was cleared as investors lost a lot of money. Interestingly, we, the common investor haven’t been tricked into making money just this once. There were several instances in the past and in the present that present the same picture: start with less money and make a ton in less or no time at all.
Insurance products are still being sold as money making chips, stocks are still openly recommended as blockbusters (without a proper risk assessment) and real estate still remains as an attractive investment option.
As a matter of fact, all the investment products mentioned above are indeed not economic at all. A ULIP insurance, being the cheapest of all can chop out upto Rs. 1.00 Lac per year. 1000 shares of any random blue chip stock can make your bank balance thinner by about Rs. 3.00 Lac or more. Real estate, would even force you up to take a loan too!! Citing tax benefits are now a common part of a real estate broker.
Sadly, irrespective of how high pitched, well advertised these strategies are, they fail to justify one important dimension of investment: Investment/Spend Capacity.
One of the few investment strategies that takes care of the investment capacity is Systematic Investment Plan. Mutual fund distributors, well aware of this, pitch the product as a fixed investment product and cite a lot of benefits irrespective of the type of fund they are canvassing.
But have you ever wondered what makes an SIP work? When most investments that produce considerable returns are capital intensive, how does SIP keep up? The answer to this is a very simple three word, self explanatory term: Rupee/Dollar Cost Averaging.
Now, to anyone who has been familiar with the world of finance, can figure out easily what this term means by simply just differentiating the term to three separate words. But, since SIP is tool to canvas investment product to those who are not much into investment, let’s find out what Rupee Cost Averaging means.
Irrespective of the investment, purchasing power, the value of securities in the markets keep on varying consistencies. The degree of variation is another chapter, but its existence is what drives the profits and losses in the markets.
Rupee Cost Averaging is a strategy of shelling out a fixed amount of money to gather as much investment as it can. Though canvassed for ULIP and stocks, RCA is most apt for mutual funds as their pricing is up to 4 decimal places.
RCA assumes the investment like any other commodity and applies a very simple formula: Let me buy more when prices are low and when the prices soar, I will buy less. But the money that I would be spending would remain the same.
If I intend to spend Rs. 1000/month in my RCA based investment, I will spend only and only Rs. 1000, irrespective of the fact that how high or low the value of securities really is.
Now, a lot investment companies are trying to sell Rupee Cost Averaging as a product of sure wealth creation or less market risk. The main motive of cost averaging is not at all limited just to manage risk, but also limits your spending capacity and average out the high priced with the low priced buying. Yes, this is an easy investment for those who seek easy and regular investment for medium to longer terms.