How Rupee Cost Averaging Works?
Rupee cost averaging balances the high and low costs of mutual fund units (called Net Asset Value or NAV), thus making market volatility work in favour of investors allowing you to achieve a lower average cost per unit.
Consider this hypothetical example of two investors:
| Investor A | Investor B | |
|---|---|---|
| Contributions one-time |
Invests 1000 units for Rs.10,000 a month @ NAV Rs.10/- | Invests 12000 units for Rs.1,20,000 a month @ NAV Rs.10/- |
| NAV (net asset value) falls due to market volatility |
Fund’s NAV falls to Rs.5, Investor A gets Rs. 2,000 units for same cost. Fall in NAV. | NAV falls but Investor B won’t get benefit of this |
Monthly investing benefits the Investor A so when NAV falls, Investor A could buy more units compared to Investor B who gets fixed units. Investing through SIP benefits you in market volatility.
How compounding works?
Compounding earns a return on every rupee, as your initial principal increases, it gives you the ability to gain higher returns. Consider this hypothetical example of two investors:
Power of Compounding: Key is to start early
| Investor A | Investor B | |
|---|---|---|
| Contributions | Rs.5,000 per month (starting at age 25) |
Rs. 10,000 per month (starting at age 35) |
| Total Contributions at age 65 | 24 Lakhs | 36 Lakhs |
| Corpus at age 65 with 12%* Compounding | 5.15 Crores | 3.24 Crores |
| Earnings (contribution minus corpus) |
4.91 Crores | 2.88 Crores |
Investor B never catches up A and the difference is substantial. Save yourself from facing Investor B’s situation.