Rupee
Cost Averaging
Stock markets
world over are characterized by ups and downs. Predicting
right moment to enter and exit the market consistently is
virtually impossible. Best of fund managers also find it
difficult to predict stock markets. This unpredictability
is both an opportunity and threat depending upon how you
use it. Here is a proven investment strategy that attempts
to take advantage of this volatile nature of the stock markets.
This strategy is called Rupee Cost Averaging.
Simply put,
Rupee Cost Averaging is a disciplined investment practice
that takes the guesswork out of "timing" the markets.
This strategy involves investing a fixed amount in the same
investment at regular intervals - say, every month or every
quarter. The essence of this strategy is that more units
are purchased automatically when prices are low and fewer
units when prices are high. Over time, this result in the
average cost per unit - the money you pay - being lower
than the average price per unit.
How It Works
It is important to note that although Rupee Cost Averaging
eliminates the guesswork involved in market timing, it does
not guarantee a profit or guarantee against loss in a declining
market. However, with Rupee Cost Averaging you avoid investing
too much when the market is high or too little when the
market is low.
How
To Make It Work For You?
- Decide on an amount that
you are comfortable investing regularly over a period
of time. (Any amount say from Rs.2000 onwards)
- Choose how often you want
to invest, say, monthly or quarterly.
- Maintain a long-term perspective.
Rupee Cost Averaging works best over extended period of
time.
- Invest regularly; do not
be influenced by short-term fluctuations in the markets.
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The
Power of Compounding
Inflation can
steadily erode the value of your income. However, long-term
investing can provide returns that outpace inflation-through
the power of compounding.
Year after
year, any money that you invest may earn interest, dividends,
or capital gains. When you reinvest those earnings, they
help generate additional earnings; those additional earnings
help generate more earnings, and so on. This is called compounding.
For example,
if an investment earns 8% per year and these earnings are
reinvested annually:
- After one year, your total
return will be 8%.
- After five years, your cumulative
total return will be 47%.
- After 10 years, your cumulative
total return will be 116%.
- Best of all, the sooner
you begin investing, the greater the compounding effect.
Consider
the example of Chhaya and Punit, both 65 years
old. They worked for the same company for 35 years and both
invested in the same managed fund.
- Chhaya started investing
at age 30. She invested Rs. 1,000 each year for ten years
and earned 8% per year. Then she stopped contributing.
Her investment continued to earn an 8% annual return.
When she reached age 65, her Rs.10,000 had grown to Rs.107,148.*
- Punit didn't start investing
until age 40 and then invested Rs.1,000 each year for
25 years. He also earned 8% per year. At the end of the
period, his Rs.25,000 investment was worth Rs.78,954.
As you can
see, although Chhaya contributed to her investment for 15
fewer years than Punit and invested Rs.15,000 less, she
accumulated Rs. 28,194 more than Punit-simply because she
started investing ten years earlier. (This example is for
illustration only. Your returns may differ.)
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