In part 1 we covered how Rupee Cost Averaging works in practical investment scenario. But Lump Sum investment is also another way and particularly what to do when you have money at hand, to go right now and invest? So, let’s go more in detail on these 2 strategies and find a way to deal with investment using both.
Is Rupee Cost Averaging Worth It?
Based on the examples from Part 1, you are probably thinking that using Rupee Cost Averaging is not worth the hassle. After all, you would have made more money by lump sum investing as opposed to Rupee Cost Averaging. But there are some key reasons as to why you should not completely rule out Rupee cost averaging as an investment strategy.
Goal of minimizing risk: when you use Rupee Cost Averaging, you minimize risk by investing over a period of time. You have no idea when the market is at a peak, so by systematically investing each month for a period of months, you lessen the risk of investing at the wrong time.
Buying low: another reason to look into Rupee Cost Averaging is to buy low. Any decent investment book you read will tell you to buy low. The problem is that when emotions and money interact, we rarely buy low. We most likely buy high – when everyone is excited and making money hand over fist as seen in the chart below.
You should be investing at the opposite time – when the market is dropping. You will buy more shares/units and will have a greater return when the market goes back up.
It works: Finally, Rupee Cost Averaging works, especially over the long term. When I speak of the long term, I mean over 10 years or greater. Yes, the lump sum strategy I pointed out works better here, but that is only over a period of roughly a year. You need to look long term.
Many of the arguments against Rupee Cost Averaging won’t look this far ahead. They will point out one year or two years later how you would have been better off investing with a lump sum.
So should you use Rupee Cost Averaging all of the time? Unfortunately, the answer is still not so simple.
Reasons Against Rupee Cost Averaging
So those are the reasons why you should consider Rupee cost averaging but what are some reasons Rupee Cost Averaging might not make the most sense for you? Here are some reasons.
High costs: if you are looking to use a Rupee Cost Average strategy when investing in stocks, the price of the broker commissions hurt you enough that lump sum investing is a better option. MFs also the Asset Management Charges tends to rise with rising AUM.
You’re not a disciplined guy: if you are easily spooked when it comes to investing, a lump sum strategy might be better for you. The reason is because you can invest once and be done. With a Rupee cost averaging strategy, you might get scared and skip an investment month here and there. Doing this will hurt you tremendously, mainly because the most likely outcome is that you will spend the money instead. However, you can opt for direct debits/automatic buying features to overcome this.
You’re stuck on an investment: another reason to skip Rupee cost averaging is if you are in love with a loser. By this, I mean a stock or scheme that is dropping each month. You might get excited that you are buying low and owning more shares/units each month, but the truth is you are just throwing money away on a stock that is going nowhere. So if yu are not investing in right scheme or shares the strategy may work against you.
Final Thoughts
So, every strategy has its pros and cons but in Rupee Cost Averaging the pros overtake cons. There are host of
situations where it works:
- By investing a little amount over time, you guarantee that you will be investing your money and saving for the future. Retirement contribution is one such
- You can start as small as Rs 100.
- You don’t have watch screens, follow prices and time the market.
- It works for sure in long terms like a 10 year plus as economic cycles need time to change and repeat themselves.
- For people who earn every month or generate money in tranches to invest, this is the only way to wealth creation.
At the end of the day, Rupee cost averaging is a viable option when investing your money. If I wanted to, like Mutual Fund Companies do, I could have played with the numbers enough to prove my point without a shadow of a doubt, but that wouldn’t be totally honest.
But as I said this is the best way as meet most of the criteria.
Share your comments and what do you think on this?
