While investing in markets, investors try to time the market which is extremely challenging. Millions of investors have lost money while trying to time the market. Hence, rupee cost averaging is a strategy for investors to reduce their average investment cost by investing regularly in the market. In other words, investors continue to invest irrespective of market lows or highs.
Similarly, when you invest a fixed amount in a mutual fund every month through SIP, you are not tracking the Net Asset Value (NAV). So when the NAV falls, you receive more mutual fund units.
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On the other hand, when the NAV rises, you receive lesser mutual fund units. As an investor, you need not worry about market fluctuations because this strategy will help you average your investment cost. Also, it will help you sail through the short-term volatility and reap benefits in the long term.
Let us understand with a help of an example -
Total Investment - INR 12,000 Total Units - 732.77 Average Unit Price - INR 16.7
You can notice that the number of units increased during the bear market (falling market), but the value of investment increased during the bull market (rising market). Therefore, both market forces have a combined effect in the long term for wealth creation through the power of compounding.
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