According to Suresh Sadagopan, Founder of Ladder7 Financial Advisories, as investors what we normally tend to do is that we tend to invest when the markets are going up and we tend to clam up when the markets are coming down.
Q. What is rupee cost averaging? How to make the best use of it?
A: Lot of you must have heard of Systematic Investment Plan (SIP). SIP is nothing but rupee cost averaging. As investors what we normally tend to do is that we tend to invest when the markets are going up and we tend to clam up when the markets are coming down, which is exactly what we should not be doing.
The point is we are trying to time the market and we are trying to get it right. The normal correct principle would be to invest when the markets are low when you will be able to get more units for the same investment, let us say Rs 1,000 or Rs 2,000 what you are investing.
When the market is high you do not stop investments, you continue to invest in the market, but you are going to get lesser units, but since you do not know how high or how low the market will go you continue to invest a standard amount of money on a monthly basis, maybe Rs 5,000, Rs 10,000 so that over a period of time your cost of acquisition of the unit comes down to be much lower than what you would have otherwise paid. This is called rupee cost averaging.