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
- NSE – National Stock Exchange
- 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
| Date | Investment | Units | Unit Price |
| Feb 2020 | 10000 | 1000 | 10 |
| May 2020 | 5000 | 555.555 | 9 |
| August 2020 | 5000 | 672.043 | 7.44 |
| Total | 20000 | 2227.985 | RCA ? |
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
| Date | Investment | Units | Unit Price |
| Feb 2020 | 10000 | 1000 | 10 |
| May 2020 | 5000 | 374.932 | 13.3351 |
| August 2020 | 5000 | 339.595 | 14.7227 |
| Total | 20000 | 1714.527 | RCA ? |
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
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