Power of rupee cost averaging: How investing small amounts regularly can build wealth over time.
The rupee cost averaging method involves investing a fixed amount of money regularly, regardless of the market's performance. The basic premise of rupee cost averaging is to take advantage of the fluctuations in the stock market. Rupee cost averaging is particularly useful for investors who are just starting and may not have a lot of experience with the stock market.
For an illustration, imagine you are investing Rs. 1000 every month by purchasing mutual fund units of fund X. If the (Net Asset Value) NAV goes up to Rs. 20 in the second month from Rs. 10 earlier, you will be able to buy only 50 units (Rs. 1,000 / Rs. 20). However, if the price of the fund goes down to Rs. 5 NAV in the third month, you will be able to buy 200 units (Rs. 1,000 / Rs. 5).
Rupee cost averaging allows you to buy more shares at a time when the market is down and fewer shares at a time when it is up. This helps to build you build wealth in the long run without worrying about market volatility This means that you are less likely to be affected by sudden drops in the market and more likely to benefit from long-term growth.
1. Encourages disciplined investing: : Rupee cost averaging encourages disciplined investing by creating a habit of investing that becomes a part of your routine. This can help you stay committed to your investment plan and avoid the lure to time the market.
2. No need for predicting the market’s performance: Rupee cost averaging removes the need to time the market. You don't need to worry about whether the market is going up or down because you are investing a fixed amount of money at regular intervals.
3. Provides a consistent investment plan: Rupee cost averaging provides clarity and consistency to invest so that you achieve your financial goals over the long term. Building a consistent habit of investing irrespective of market volatility can help you to achieve your financial goals.
4. Reduces the risk of investing all money at once: The risk associated with investing a lump sum of money all at once can be reduced by rupee cost averaging. Investment risk is minimized as risk is spread out during various market cycles. This reduces the probability of losing your money.
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