Since the market comes with ups and downs daily, its very difficult for a common-man to time the market because technically even an experienced investor fail to do it many times. Hence this topic of “Rupee Cost Averaging Concept Explained” comes handy to solve this problem.
As we all know, gaining profit in share market only happens when you buy low and sell at high prices. OR when you buy more quantity when the price is less and buy less quantity of units/share when the price is high. However, the main question here is how can a common man predict when the prices are going to reduce or increase?
Rupee Cost Averaging Concept simple means you automatically buy less share/unit of a particular company/mutual fund when the price is high and then you automatically buy more when the price is low, which is the best practice. But how does it automatically work?
Let me explain this better with an example:
Lets says the share price of XYZ company is Rs. 600 and you have set up a monthly SIP for Rs. 5000/-. So you buy 8.33 unit/share in that month (5000/600=8.33).
When the price increased next month to Rs. 900, you automatically buy 5.55 unit/share. This is because we set up a fix Rs./$ amount to invest every month in an SIP and not a fix unit.
So even if the market is going down, you are going to buy more units (if its a mutual fund) or more share (if its direct equity) because they are selling at a cheaper price.
On the flip side, if you try timing the market and think the market is going to crash so you withdraw funds and the market goes up then you’ll end up buying when the prices are high. Rupee Cost Averaging is widely considered as one of the most underrated benefits of SIP.
In the bull market, the NAV goes up. In bear markets, the units you acquire goes up. In long run, combination of both create wealth. It has to be the combination of both to create wealth. If either of them is missed, your fortune is missed.
Now coming to the other part about principal protection as there is hype of recession all around.
If you google when is the next recession, you’ll find 100 articles stating that it’s approaching soon, they’ll even give you a date (or a past date which never happened). On the other side, if you google what will be Sensex in 2025, you’ll probably see experts stating it’ll touch 1,00,000 points and same for other indices.
No one can ever identify the global recession and even if you do, you cannot be 100% sure to withdraw your funds, not even the fund managers who manages billions under asset can do that.
“Only buy something that you’d be perfectly happy to hold if the market shut down for next 10 years.”
Warren Buffet
Hardly a few very intelligent people (3 or 4 group of people in the whole world) noticed the financial crises of 2008 before it happened and they were all hedge fund managers who deals with all kind of trading (shorting, leveraging, F&O, etc, you might see the movie “The Big Short” for that).
So my final advice, do not try to time the market, even Warren Buffet, the great investor of our generation doesn’t recommending timing the market.
“Calling someone who trades actively (intra-day trader) in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
Warren Buffet