Saturday, January 23, 2016

Impact of rupee cost averaging

Impact of rupee cost averaging is a bit hard to understand for people who have not studied finance. It is generally used for balancing your investment over a long duration of time. 

Investment itself is a tricky thing to understand. Markets are always going up and down and most people try to predict these market fluctuations. It is this nature of people where they try to predict the market is what leading them to tragedy. Even the best financial analyst can't predict the market with guarantee so it is really useless to try and predict market.

What we can do is that we can invest in the market regularly. The best investment tool for this kind of investment in SIP or systematic investment plan. SIP invest regularly in the market through mutual funds. Mutual fund is investment tool for investors who don't understand market but want to invest in the market. Mutual fund pools money from lots of investors and then put them in the market.

Every mutual fund have a basic guidelines in which it invests the investors money. For example, an equity fund is a fund which wants to generate high revenue for it's investors. These funds are also high risk funds. There are also ELSS funds which help you in tax savings. 

SIP can be understood to be like an RD or recurring deposit in which some amount of money is transferred from your account to the RD account. In case of SIP, some amount of money is transferred from your account to the mutual fund of your choice. 

You can choose your fund according to your need and investment horizon. If you have long horizon then you must try and invest in equity as on average equity market will definitely provide you growth higher than fixed deposits and help you negate the inflation present in the market.

By doing an SIP, you are investing in the market every month. By investing small amount of money every month you are negating the market ups and downs.For example if the market is at 25,000 in January and then 24000 in February and 26000 in march then what you are doing is that you are investing in all kind of markets i.e., you are investing money when there is up and when there is down as well. By doing this you are averaging out the market. This phenomenon of averaging out the market using regular investment is known as rupee cost averaging. 

When the market is down, we will get higher number of units of mutual fund because the cost per unit is less. When the market is down we will get less number of units of the mutual fund for the same amount of money invested.

So, if you are trying to invest in the market then don't waste much time to understand and predict the market. Just start and SIP and let the impact of rupee cost averaging do the magic for you.
This blog post is inspired by the blogging marathon hosted on IndiBlogger for the launch of the #Fantastico Zica from Tata Motors. You can apply for a test drive of the hatchback Zica today.

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