If you ask any professional investor what the hardest investment task is, he or she will likely tell you that it is picking bottoms and tops in the market. Trying to time the market is a very tricky strategy. Buying at the absolute low and selling at the peak is nearly impossible in practice. This is why so many professionals preach about rupee cost averaging .(RCA)
Although the term might imply a complex concept, RCA is actually a
fairly simple and extremely useful technique. Rupee cost averaging is the
process of buying, regardless of the share price, a fixed dollar amount of a
particular investment on a regular schedule. More shares are purchased when
prices are low, and fewer shares are purchased when prices are high. The cost
per share over time eventually averages out. This reduces the risk of investing
a large amount in a single investment at the wrong time.
Let's analyze this with an example. Suppose you recently got a bonus for your previously unrecognized excellence (just imagine!), and now you have Rs.10,000 to invest. Instead of investing the lump sum, with RCA, you'd spread the investment out over several months. Investing Rs.2,000 a month for the next five months, "averages" the price over five months. So one month you might buy high, and the next month you might buy more shares because the price is lower, and so on.
This plan is also applicable to the investor who doesn't have that big lump sum at the start, but can invest small amounts regularly. This way you can contribute as little as Rs 500 a month to an investment. Keep in mind that rupee cost averaging doesn't prevent a loss in a steadily declining market, but it is quite effective in taking advantage of growth over the long term.
Let's analyze this with an example. Suppose you recently got a bonus for your previously unrecognized excellence (just imagine!), and now you have Rs.10,000 to invest. Instead of investing the lump sum, with RCA, you'd spread the investment out over several months. Investing Rs.2,000 a month for the next five months, "averages" the price over five months. So one month you might buy high, and the next month you might buy more shares because the price is lower, and so on.
This plan is also applicable to the investor who doesn't have that big lump sum at the start, but can invest small amounts regularly. This way you can contribute as little as Rs 500 a month to an investment. Keep in mind that rupee cost averaging doesn't prevent a loss in a steadily declining market, but it is quite effective in taking advantage of growth over the long term.
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