Rupee Cost Averaging in Mutual Fund

Rupee Cost Averaging

Rupee Cost Averaging is shortly known as RCA is the concept of the amount invested at regular intervals irrespective of whether the markets are going high or low.
RCA ensures that you buy more units when the markets are low and lesser units when they are high. This approach brings down your average cost per unit over the period.

First you need to know Stocks, Market and Mutual Fund

Stocks

Stocks is an equity share of the company. If you buy a share of ITC or Tata Motors, then you are the owner of that share of that company.

Market

Market is Stock exchange where companies shares listed. Investors/Traders/etc. to buy and sell the shares.

Two stock exchanges in India

  1. NSE – National Stock Exchange
  2. BSE – Bombay Stock Exchange
Mutual Fund

A mutual fund is a company that pools money from many investors(you and me) and invests the money in securities such as stocks, bonds, and short-term debt.

RCA Formula

Rupee Cost Averaging = Total Amount Invested / Total Units Accumulated

Example 1: Invest when market is low

DateInvestmentUnitsUnit Price
Feb 202010000100010
May 20205000555.5559
August 20205000672.0437.44
Total200002227.985RCA ?

Lets calculate the Rupee Cost Averaging value per unit using above table 

Total Amount Invested is 20000

Total Units Accumulated is 2227.985

RCA Formula:

RCA = 20000/2227.985

         = 8.976

Average cost per unit is 8.976, reduce loss of principal investment and accumulated more units.

Example 2: Invest when market is high

DateInvestmentUnitsUnit Price
Feb 202010000100010
May 20205000374.93213.3351
August 20205000339.59514.7227
Total200001714.527RCA ?

Lets calculate the Rupee Cost Averaging value per unit using above table 

Total Amount Invested is 20000

Total Units Accumulated is 1714.527

RCA Formula:

RCA = 20000/1714.527

         = 11.6650

Average cost per unit is 11.6650, reduce the unit price even invested at 13 or 14 per unit.

Conclusion

RCA is helps to buy more units when market is low and buy less units when market is high. If you stay investing in good mutual fund at regular interval, RCA value per unit is less than current value per unit (NAV) of  mutual fund. Check out other post Mutual fund and its types. Follow my Youtube channel Saving Suggest


Zivame [CPS] IN
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