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Rupee Cost Averaging Using SIP

alt text image source Principal India

We have been hearing and reading it everywhere.

“SIP your way to financial freedom”

And this is only one side of the coin. SIP (Systematic Investment Plans) is a way to invest in mutual funds and not a product in itself. It is something like an RD (bank recurring deposit) into equity or debt markets.

The other question is whether to invest in a SIP or Lumpsum mode?

To understand this question we need to formulate what rupee cost (dollar cost for international perspective) averaging is?

Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This, in turn, ensures that you buy more shares of an investment when prices are low and less when they are high.

So this basically means when the prices are trending down your investment purchase is lower than what it would be in case of lump sum investment. Similarly, if they are trending higher your purchase will be higher! Now this means the overall return on investment will be lower in this case.

So we conducted some analysis about investing a lump sum and using SIP for the fairly long time frame (10+ years). It was seen that during this period remaining fully invested outperformed SIP’s significantly though with only slightly higher standard deviation.

Also, if we do a rolling returns analysis of the portfolio we see there is a 70%+ chance you will be better of putting your money to work immediately rather than building a portfolio drop by drop. The better strategy would be to switch between debt and equity and in a lump sum way.

But it doesn’t mean that SIP investing is a bad strategy. Just think about would you prefer investing ₹1 lakh per month or deploying ₹ 12 lakhs at one shot. It is indeed a good tool to build the portfolio of huge sums with less emotion and more disciplined approach.

This will certainly help you up your game and be ready to get into direct stocks! Click to find ways to make money