ACA Gullak

Systematic even Amidst Volatility

SIPs have been a popular term among the investor community, and so is ‘rupee cost averaging’. Whenever one talks of investing through a systematic investment plan in an equity mutual fund, one makes sure to refer to rupee cost averaging.

Rupee-cost averaging is something that seasoned investors do when they invest in stocks. But as first-time investors lack the knowledge or expertise to continuously track the market, they are advised to invest via SIPs

Concept – Rupee Cost Averaging

The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. The equity markets have always been volatile reflecting the ups and downs of the economy.

If you recall the law of demand, it says that a higher quantity of a commodity is purchased when it is least expensive. Conversely, the demand tends to reduce the price of the commodity rises.

The fundamental principle of investing reinforces the same thing. It guides the investor to “buy-low and sell-high”. It means that you should buy more units of a mutual fund when the markets are down and fewer units when the markets are up.

However, most of the investors end up doing just the opposite. They start buying when the markets are rising and suddenly redeem upon a slump. Ultimately, their average cost of investing increases and returns fall.

In a SIP investment, the factor of volatility is reduced and as a result, the overall gains will also increase.

Rupee cost averaging works out best in choppy markets but is useful even when the markets are in a bull run. It essentially helps you buy less when the markets are expensive and buy more when the markets are cheap.

An SIP is an easy way of doing this thanks to the benefit of rupee cost averaging.

Let Us Understand this with actual Data

Let as assume, an investor started a Rs. 10000 During the Financial Crisis of 2008.

  Nifty 50 Value of Rs. 10000 SIP SIP Return (%)
Jan-08 6144 10000 0
Apr-08 4740 36196 -9.5
Jul-08 3897 55435 -20.8
Oct-08 3044 74902 -32
Jan-09 2683 76020 -37
Apr-09 2675 104269 -31
May-09 3654 164391 -3
Jun-09 4530 213797 18.8

The data clearly shows that if the investor had continued his SIP for a period of one year during the financial crisis, he would have earned a return of 18.8% in just one Year.

What about the Present Crisis?

This is the Current Scenario

Rs. 10K SIP Nifty Mcap 100 Value of 10K SIP SIP Return (%)
Jan-18 21110 10000 0
Apr-18 18757 37578 -6.1
Jul-18 18181 65140 -6.9
Oct-18 17285 89750 -10.2
Jan-19 17894 123451 -5
Apr-19 18333 158082 -1.2
Jul-19 15755 172497 -13.8

Let us assume the Nifty Midcap 100 Index Falls 2.5% every month for the next two years. The scenario would be something like this

Rs. 10K SIP Cum Invst Value of Rs. 10K SIP SIP Return (%)
Aug-19 200000 172497 -13.8
Nov-19 230000 189137 -17.8
Feb-20 260000 204560 -21.3
May-20 290000 218854 -24.5
Aug-20 320000 232103 -27.5
Nov-20 350000 244383 -30.2
Feb-21 380000 255765 -32.7
May-21 410000 266315 -35
Aug-21 440000 276093 -37.3
       

Supposedly if the markets starts to recover post Aug-21 and the index recovers 2% every month to reach the levels similar to Aug-19. The Returns made by the investor would be:

Rs. 10K SIP Cum Invst Value of Rs. 10K SIP SIP Return (%)
Nov-21 470000 323596 -31.1
Feb-22 500000 374006 -25.2
May-22 530000 427502 -19.3
Aug-22 560000 484273 -13.5
Nov-22 590000 544518 -7.7
Feb-23 620000 608451 -1.9
May-23 650000 676297 4
Aug-23 680000 748296 10
Nov-23 710000 824702 16.2
Feb-24 740000 905784 22.4

The Investor shall make a return of 22.4% even though the Index has only recovered to its previous levels.

Such is the power of Rupee Cost Averaging.

Stay Invested and Continue your SIP’s.

Comments

  • Company Registration

    September 18, 2019

    nice post thanks for sharing …

    Ezzus india

    reply

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