Rupee cost averaging / value averaging
To buy ‘low’ and sell ‘high’ is very difficult to do, especially in volatile markets (where prices rise and fall significantly over very short periods of time). One investment strategy that helps overcome this volatility and take advantage of it by averaging out cost of investment, is ‘Rupee cost averaging’ (RCA) or ‘Value averaging’. Under RCA, you decide how much you want to increase your investment by at fixed periodical intervals of time, say on a monthly basis. If the markets rise, you will need to invest a lesser amount or book profits. However, if the markets fall, you will need to invest more to achieve your target investment amount. Let’s understand this with an example. You plan to increase your equity portfolio by Rs 15,000 every month. In the first month, you invest Rs 15,000. In the next month, due to a market fall, your portfolio value falls to Rs 12,000. You will need to invest Rs 18,000 in this month to make up the loss of Rs 3,000 and add fresh investments of Rs 15,000. If in the following month, the market is bullish and your portfolio rises by Rs 13,000, you will invest only Rs 2,000 to bring up your portfolio value by Rs 15,000. Similarly, if the market is very bullish and your equity portfolio value shoots up by Rs 17,000, instead of investing that month, you will book profits to the extent of Rs 2,000. RCA helps you undertake disciplined investing. You need to set a target and use the market movement to achieve it. It also helps you decide when and to what extent to exit from the market. However, in a long bull or bear phase, this strategy becomes difficult to implement.
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