What Is Rupee Cost Averaging: How SIP May help you Buy More When Markets Fall and Vice Versa

Rupee cost averaging is simply a feature of SIPs. When you keep investing a certain fixed sum of money regularly through SIPs, you end up averaging your investment cost over time. 

This happens because your SIP buys lesser fund units when prices are high in the market and buys more MF units when prices fall. Over time, this may produces an average cost per unit that is lower than the simple arithmetic average of the NAVs across the entire investment period. 

Now that you know the meaning of rupee cost averaging, let’s understand exactly how this works:

• You invest a fixed sum through SIP every month.
• You are allotted a certain number of units as per the prevailing NAV for the day. 
• You buy fewer units of the fund when the markets are in a bull run, and the NAV is high.
• You buy more number of fund units when markets are falling, and the NAV is down.

What this does is average out the cost of per-unit investment over time. 

We’ve established that SIPs use rupee cost averaging. But how can they accumulate more units when markets fall? The equation is simple:

Markets fall → May result in lower NAV → More units with the same amount

Let’s take an example to see how SIP uses rupee cost averaging to buy more units when markets fall and vice versa. Suppose you invest Rs. 5,000 every month through a SIP with a starting NAV of Rs. 24/unit. 

Now, let’s say the the market falls and the NAV of the mutual fund also falls. Since your SIP amount remains the same, you automatically purchase more units at the lower NAV. Here’s how:

*Disclaimer: This example is for illustration purposes only.

• Total Investment: Rs. 30,000
• Total Units Purchased: 1,664.94 units

When the NAV is Rs. 24, the SIP buys only 208.33 units. However, when the NAV falls to Rs. 13, the same Rs. 5,000 buys 384.62 units. This shows that the same investment amount can buy almost 85% more units than in January. This happens because a lower NAV with an unchanged SIP amount means more purchasing power for additional units. Simply put, your SIP can leverage RCA in mutual funds to buy more units when markets decline, without requiring any additional action from you.

Now, let’s assume the market starts rising and the NAV increases over time. Since your SIP amount remains Rs. 5,000 every month, you buy fewer units as the NAV increases.

*Disclaimer: This example is for illustration purposes only.

• Total Investment: Rs. 30,000
• Total Units Purchased: 1,581.07 units

When the NAV is Rs. 13, your SIP buys 384.62 units. As the NAV increases to Rs. 27, the same Rs. 5,000 buys 185.19 units. This is because a higher NAV means the same investment amount purchases fewer units. 

Over time, a SIP invests across both rising and falling markets, helping average the purchase cost of units. However, mutual fund returns are market-linked and not guaranteed.

RCA in mutual funds offers several benefits, including:

• Potentially Tackling Market Volatility 

Markets do not move in one direction all the time. Since SIPs invest a fixed amount at set intervals, you continue investing during both market highs and lows. This may help reduce the impact of short-term market fluctuations over time. This SIP market volatility benefit is a key advantage. 

• Avoids the Need to Time the Market

Since you keep investing a fixed sum regularly, you don’t have to consistently time the market. You don’t have to put in the effort to monitor the market daily and time your entry and exit. 

• Capture Potential Opportunities from Falling Markets

Rupee cost averaging in SIPs may purchase more units at lower prices when markets are falling. If markets recover, the extra units bought at lower NAVs may be worth more, potentially increasing the value of your investment. 

Similarly, rupee cost averaging in SIPs may purchase less units at higher prices when markets are rising. Over time, your SIP continues to invest the same amount across different market conditions without requiring you to time the market.

Now you know the meaning of rupee cost averaging in SIPs and how it works. Rupee cost averaging in SIPs during falling markets does two things:

• Buys more units at a lower NAV 
• Gives you opportunity to benefit from potential NAV recovery when markets rise

Similarly, rupee cost averaging in SIPs during rising markets:

• Buys less units at a higher NAV 

All investors have to do is stay disciplined with a fixed investment amount over time, regardless of the market. RCA in mutual funds (through SIPs) takes care of the rest. 

1. Should I pause my SIPs in falling markets?

Pausing SIPs in falling markets is not a good option as doing so may damage the overall long-term return potential of your SIPs. When markets fall, your fixed SIP may buy higher number of units (at a lower price). These cheaper units may be worth more once the market recovers.

2. Does rupee cost averaging work in rising markets?

Rupee cost averaging works in all markets where prices fluctuate around a long-term upward trend. In a market that keeps rising, RCA may be equal to the arithmetic mean of all the NAVs. The main benefit of RCA becomes visible when markets fall and recover. 

3. When does rupee cost averaging not work?

Rupee cost averaging may not work or may be compromised in the following circumstances:

• Markets that are persistently declining and never recover (historically rare).
• When the asset is a declining asset (for instance, a sectoral fund where the sector is experiencing structural disruption)
• When the SIP is stopped when markets fall.
• When the investment horizon is too short for real RCA benefits to be seen.

4. What is dollar cost averaging in India?

In India, it is called rupee cost averaging (RCA) as per the currency appropriateness. RCA is simply an investment approach where you invest a fixed sum at regular intervals for a long time to average out the per-unit investment cost in mutual funds.