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Probably the best strategy of all

Rupee Cost Averaging

We've talked about several strategies, but we have reserved the 5th and best one for last!

Rupee Cost Averaging is defined as a constant investment into a fund at predetermined times such that the investor purchases more units when the price is low and less when it is high.

What this simply means is that you start a Systematic Investment Plan (SIP) with a mutual fund and you devote a fixed rupee amount towards purchasing the units every month (or week, or quarter, whatever the predetermined period may be).

Let's say you put aside Rs.1000 every month. If the price of the mutual fund is low this month, say about Rs. 9.00, your Rs. 1000 allows you to buy about 111 units. Next month, the price of the mutual funds may have risen to say Rs. 10.00. Your Rs.1000 would buy you 100 units. On the 3rd month the price drops again to Rs. 8.00, at which you acquire 125 units.

Altogether you would have spent Rs. 3000 and purchased 336 units in these 3 months. The average price of each unit would be Rs.3000 divide by 336 units = Rs.8.92

If you had spent all your Rs. 3000 in the first month, you would have paid Rs. 9 per unit. So 'averaging' allowed you buy more units at a lower average price.

Make Volatility work for you

When you average this way, you are making the inherent volatility of markets work for you. It is impossible to buy low and sell high all the time. So the best solution is not to be caught committing all your money at the high point of a market cycle. If you did, you may not be able to make any profit until the next cycle comes along. By averaging, the price of your units will tend towards the middle price of the market cycle that you are in. You will still get to enjoy a pretty good upside.

So instead of stressing out over the volatility of the market, you can rest assured knowing that your savings plan actually works for you in those volatile conditions! That's what mutual fund investing is meant to do. Give you more money and less stress!

The Right Funds: Forming a Portfolio

Of course, it is a huge commitment to continuously pour money into one mutual fund. You have to research the fund well and understand the style of the fund manager.

In order that you do not put all your eggs into one basket, you may want to diversify your investment across several mutual funds. These should be of different sectors and across different asset classes. This way you spread your risks and also get to benefit from the growth of different areas. We deal with this in our next chapter.

Next : Forming a portfolio