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Is Rupee Cost Averaging right for you?
A solution or strategy that may work in one situation may not work in the other. This principle applies to most things in our lives, including financial concepts like rupee cost averaging. Therefore, you should understand and keep in mind a few important things before investing to make rupee cost averaging work for you.
Rupee cost averaging works well over the long-term, especially when you are investing in instruments such as equities, ETFs or mutual funds over bonds and money market funds.
To know if Rupee Cost Averaging is right for you, ask yourself these questions.
Are you convinced on the performance of markets in the long-term, but don’t know how to deal with volatility?
Do you have the financial discipline to rigidly stick to an investing schedule?
Do you have the stomach to continue investing even in the period when the market is at a low cycle?
If your answer is yes to all these questions, then rupee cost averaging can certainly make a positive impact on your portfolio, especially in a volatile market. It helps reduce the cost per unit in a mutual fund or share price over a long-term and gives you higher returns when you withdraw money in the same systematic way.
Though rupee cost averaging doesn’t eliminate risk or ensure returns, it can prove to be a very effective hedge against volatility. The following advantages give an edge to investors who are willing to keep investing irrespective of market conditions.
Advantages of Rupee Cost Averaging
It frees you from the cumbersome process of keeping a constant check as in the case of a lump sum investment.
It takes the ‘timing’ factor out of the markets.
It limits your losses in the market's down cycle.
It enables you to buy more when markets are low and buy less when markets are high.
It helps instil discipline in making regular investments.
As a disciplined long-term investment approach, the rupee cost averaging principle can be leveraged to smoothen the market’s ups and downs and reduce the risks of investing in volatile markets.
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#1
Rupee cost averaging can only work if you have commitment and stick to your investing schedule with discipline.
#2
Don’t panic by the performance of your portfolio in the short-term. Rupee cost averaging is most effective over a long-term period.
#3
SIPs have proven to be the most effective route for rupee cost averaging.
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