Topic 5 of 9~5 min read

Rupee Cost Averaging

Definition

Rupee Cost Averaging (RCA) is an investment strategy inherent to SIP where a fixed rupee amount is invested at regular intervals, automatically purchasing more units when prices are low and fewer units when prices are high. This results in the average cost per unit being lower than the average market price over the investment period.

In Simple Words

Imagine you go to a market to buy mangoes every week, spending exactly ₹100 each time. One week mangoes cost ₹50/kg, you get 2 kg. Next week they cost ₹25/kg, you get 4 kg. Over two weeks, you spent ₹200 and got 6 kg. Your average cost is ₹33.33/kg — lower than the average market price of ₹37.50/kg. SIP works exactly like this. By investing the same amount every month regardless of market conditions, you naturally buy more units when prices are low and fewer when prices are high. Over time, this brings down your average cost and improves returns.

Real-Life Scenario

Meera invests ₹10,000/month via SIP for 6 months: Month 1: NAV ₹100, Units = 100.00 Month 2: NAV ₹80, Units = 125.00 (market dip) Month 3: NAV ₹70, Units = 142.86 (further dip — most units!) Month 4: NAV ₹85, Units = 117.65 (recovery) Month 5: NAV ₹95, Units = 105.26 Month 6: NAV ₹110, Units = 90.91 (market high) Total invested: ₹60,000 Total units: 681.68 Average cost/unit: ₹88.02 Average market NAV: ₹90.00 Current value (at ₹110): ₹74,984 Profit: ₹14,984 (25%) Her average cost (₹88.02) is lower than the average NAV (₹90.00). The dip in months 2-3 actually helped by allowing more unit accumulation.

Key Points to Remember

RCA automatically buys more units at lower prices, fewer at higher prices

Your average purchase cost is always lower than or equal to the average market price

Market dips during SIP are actually beneficial for long-term investors

RCA eliminates the need (and stress) of market timing

The benefit of RCA increases with higher market volatility

RCA is most effective in the accumulation phase (early years of investing)

Combined with compounding, RCA creates a powerful wealth-building engine

Frequently Asked Questions

Test Your Knowledge

1 questions to check your understanding

Question 1 of 1Score: 0/0

In Rupee Cost Averaging, when does an investor accumulate the most units?

Summary Notes

RCA is a natural benefit of SIP — no extra effort required

Market dips are your friend when you are investing via SIP

RCA works best over longer investment periods with market volatility

Do not stop SIP during market corrections — that is when RCA works hardest for you

RCA removes the emotional aspect of investing decisions