Definition : Rupee Cost Averaging is the technique of investment in which a fixed sum is invested to purchase securities at a regular interval irrespective of the price. There are two broad ways of investing funds: one by way of one time lump sum amount and another by way of systematic investment (recurring or SIP). In case of one-time investment, the cost of investment remains the same till it is sold. In case of systematic investment, a specific amount is invested regularly at frequent intervals irrespective of market price changes. This type of investment strategy helps average the cost of total investment and is known as Rupee Cost Averaging. The frequency of the investment can be daily, weekly, monthly, quarterly etc.
Explanation : Rupee Cost Averaging is important because predicting the market movement is very difficult. Investors find it difficult to decide the right time to enter or exit the market. Lay investors who are driven by market sentiments tend to invest when the overall market goes up and sell during market downturn. As a result, often they end up buying at a higher price and selling at a lower price. Thus, a prudent strategy for an investor is to set financial goals and continuously invest at regular intervals without bothering about market conditions. The Rupee Cost Averaging helps investors to buy more units/shares when prices are falling and less when prices are rising. This strategy of investment is particularly useful in equity-related mutual fund schemes because systematic investment neutralises the impact of short-term price fluctuations in the market.