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Many of us have an aspiration to buy low and sell high. However, while implementing our investment ideas, most of us end up attaining the exact reverse i.e. buy high and sell low. The message is loud and clear – don’t try to time the market. Given the almost efficient market we invest in, it is one of the most difficult things to do, particularly on a consistent basis. A better approach for the retail investor is Rupee Cost Averaging.
With rupee costs averaging, investors don't have to worry about what would be the price of their share next day or next year or what would be the level of interest rates next quarter.
Rupee Cost Averaging is an effective market-timer mechanism that eliminates the need to time the markets. All one has to do is to invest a fixed, pre-decided amount of money on a regular basis over a long period of time. Since the amount invested per month is constant, one buys more units when the price is low and fewer units when the price is high. As a result the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling or fluctuating. The table given below clearly illustrates the concept.
Lets take an example of Rahul, wherein he started investing Rs. 4,000 every month in the Maximiser Fund of the LifeTime Super Plan.
Period
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Invested Premium (Rs.)
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NAV of Maximiser Fund (Rs. Per unit)
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Units allocated
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7th Apr '03
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4,000
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11.34
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352.73
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7th May '03
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4,000
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11.01
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363.31
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9th Jun '03
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4,000
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12.05
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331.95
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7th Jul '03
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4,000
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13.13
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304.65
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7th Aug '03
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4,000
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13.67
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292.61
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8th Set '03
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4,000
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15.81
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253.00
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7th Oct '03
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4,000
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16.78
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238.38
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7th Nov '03
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4,000
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18.28
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218.82
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8th Dec '03
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4,000
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18.71
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213.79
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7th Jan '04
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4,000
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21.48
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186.22
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9th Feb '04
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4,000
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21.49
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186.13
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8th Mar '04
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4,000
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21.98
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181.98
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Total
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48,000
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Actual Average NAV = (11.34 + 11.01 + 12.05 + 13.13 + 13.67 + 15.81 + 16.78 + 18.28 + 18.71 + 21.48 + 21.49 + 21.77) / 12 = Rs.16.29.
NAV for Rahul = (4,000 * 12) / (352.73 + 363.31 + 331.95 + 304.65 + 292.61 + 253.00 + 238.38 + 218.82 + 213.79 + 186.22 + 186.13 + 183.74) = Rs.15.36
Based on the historical analysis for BSE Sensex for last ten years (1-Jan-1994 to 1-Jan-2004) we find that if an individual had invested Rs. 1000 ever year (SIP) he would have earned a return of 9% vis-à-vis 5% earned by an individual who had invested Rs. 1000 at the beginning of 10 year period. Similarly over a five year period (1-Jan-1994 to 1-Jan-1999) SIP investment return would have been 16.52% compared to 14.09% for a one time investment at the beginning of the period.
Thus Rupee Cost Averaging smoothens out the market ups and downs and reduces the risk of investing in volatile markets. However, rupee cost averaging does not guarantee a profit, as this depends on the performance of the market.
Convenience
Systematic Investment Plan offers convenience to investor, as it can be set-up as direct periodic and automatic withdrawals from bank accounts. At the beginning of the plan, the investor makes the asset allocation decision based on the PFP. Once the investor has made the asset allocation decision and chosen the fund manager, the Systematic Investment Plan puts the investment process on the auto pilot mode and leaves the investor to live life in peace without worrying about security of his/her future.
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